Recent apartment buyers are drowning in negative equity

By Leith van Onselen

Robert Gottliebsen (“Gotti”) has pushed the panic button today, warning that many recent buyers of rise apartments are drowning in negative equity. From The Australian:

The horrible truth is that around 15 to 20 per cent of relatively recent buyers of inner-city Sydney apartments, as well as cottages in badly performing suburbs have lost their deposit and owe more to the bank than the property is worth. In Melbourne the situation is not much better.

The crisis takes different forms. For the nation the most dangerous is what is happening among the Chinese owners and apartment developers.

But there are also widespread negative equity situations in Australian superannuation (some of which involved fraud) and among the vast number of Australians who believed “bricks and mortar” could be leveraged without risk. Many were encouraged by banks who, until recently had easy credit property policies.

Those who borrowed 90 per cent or more of the purchase price and then watched the street value of their dwelling fall 20 per cent plus (as has happened in Sydney and Melbourne small inner city apartments) are shattered.

There is hard data supporting Gotti’s claims. CoreLogic’s latest Pain & Gain Report, released last week, showed that 16% of capital city units sold at a loss during the September quarter – around the highest level since the late-1990s:

Obviously, with Sydney’s and Melbourne’s dwelling values plummeting:

 

Along with concerns around high-rise flammable cladding and structural defects, the poison of negative equity will spread.

Avoid this segment like the plague.

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Comments

    • If you know your states tenancy laws then these are best dobbed in to the local council. Most are breaching boarding house laws and the like. Councils love visiting these because the fines are huge and often charged per day.

    • This should have a trigger warning – I am fired up!

      That Phd candidate who wrote it is completely wacko thinking this is all just terribly normal. Those people are breaking the law. Evictions, deportations, etc etc are all warranted.

  1. Just waiting for the banks to start the discussion about owners having to maintain their LVR’s … who has a spare 5%+ to tip in … Dad / Mum can we have some equity please ?

    • ChristopherJMEMBER

      Easy to maintain LVR if the bank also takes a haircut. Which, is what should happen when both parties valued the property and deemed the price ‘right’ when the loan was written. Should be in the contract… but then they’d want some of the gain as a qpq, eh?

      Yeah, nah

  2. Shedding a quiet tear for Chinese property developers and investors. Wondering why it is “dangerous” for the nation? Perhaps ScoMo will invoke national security to prop up the property market?

    • Yep, the root cause of Australia’s problems today and the foreseeable future is massive Third World immigration.

      From the article – “Their slightly more mundane conclusion is that the factors behind the nation’s high property prices are record-low interest rates and strong population growth.’
      Of course East Asians, which comprise largely of ethnic Chinese, make up a large part of the immigration numbers, so people could point at the Chinese property buyers … however the real problem is the size (and composition) of the massive immigration program

  3. TailorTrashMEMBER

    “For the nation the most dangerous is what is happening among the Chinese owners and apartment developers.”
    …..whatever can that mean ?

      • TailorTrashMEMBER

        ….for the nation the most dangerous thing was allowing Chinese free rein on ownership of its homes ……

    • It tells us a lot about Gotti. Apparently losses to people from other nations matter more to him than losses to our residents. So he is happy to sell out his people to the Chinese. Traitor!

    • Presumably he means that there is a risk that they all dump their properties on the market and we see a far greater crash than the most pessimistic MB perm-bear could ever dream of, with all that entails for the wider economy.

      • mild colonialMEMBER

        I interpret it as HRH is feeling a bit shattered. How dare he feel sorry for recent investors, didn’t he spruik this whole fuqing thing?

  4. mild colonialMEMBER

    you have to think that the election will go to the party that can discuss the bubble pop first. i don’t even think logic or coherence would be necessary. simple acknowledgement would wow the public.

  5. CaptainFeatherSwordsGhostOnRoids

    what happens when the banks mark to market the value of properties on their loan book ? I imagine that will constrain the equity they have available for new loan creation.

    • No. Remember that on the banks books there are no properties, only loans.

      The value of loans needs to be provided agains/written down only if they become unlikely to be fully repaid. Just because a specufestors has lost half of his equity in a property doesn’t mean the bank takes a loss on the loan.

      For complete losses of equity it becomes a bit more dicey, but remember in the heady days banks made 105% loans (no equity), and these were carried at full value, without impairment.

    • Exactly, I interpret the changes as the disappearing of collateral, so for every dollar lost in borrower’s equity it’s a 20 dollar loss for bank lending

      • @tonydd. I think I understand what you’re saying. I said something similar to my brother two days ago. He asked me, if Australian equities go into a slide, where will all the money go except into real estate? I reminded him that all the “money” is borrowings, not real at all, and that it would go nowhere except into the ether as reduced borrowing. Vapour. All assets can go down simultaneously, it is not a zero-sum situation.

    • what happens when the banks mark to market the value of properties on their loan book ? I imagine that will constrain the equity they have available for new loan creation.

      The banks have to up their capital reserves to cover the ‘risk’ as the LVR’s march upwards of 80 – 90+%
      This means more capital sitting not available for lending and therefore more costs, = increasing rates……

      • Banks have obligations to APRA with respect to LVRs, though the detail is a bit vague. The LVR across their portfolio is bound to be rising, unless new lending is only at low LVRs – which would itself be a drag on prices.

        Capital requirements are a dual edged sword because on the other hand credit growth is slowing, they are making less new loans in aggregate so don’t need as much capital to back them.

  6. For the nation the most dangerous is what is happening among the Chinese owners and apartment developers.

    WTF? Fcuk the Chinese owners and developers. They can burn in hell. I hope they all end up begging on the streets of some Chinese city.

  7. Still a lot more room for pain in the Sydney Apartment sector.
    Prices are dropping on thin volumes as sellers are either withdrawing or refusing to drop below purchase price.
    Also the first to exit will be longer time holders that hold more equity and more than happy to take a bit of a profit cut.
    How long can recent buyers hold on for?

    • Presumably if they are recent investors they are willing to look through the short term fluctuations and hold for the longer term. The Warren Buffett five-year rule and all that. I mean, after borrowing hundreds of thousands of dollars to purchase an asset you would have done all your risk assessment so these movements would just be part of normal market fluctuations that any true investor would expect. Surely everyone who has borrowed money at significant multiples of their annual income has done a full risk assessment?

      • @Phil. Nice one. You have identified and described the intelligent, cautious, circumspect nature of investors in our recent housing boom quite neatly. I trust you appreciate my irony as I yours.

      • A nice one indeed. The prudent investor should also set aside 50k to renovate and upgrade the kitchen and bathroom in order to get a guaranteed 20% increase in the value of the property.
        Sarcasm aside, renovation costs and stamp duty are not included in the above figures. There are not small costs

    • Prices are dropping on thin volumes as sellers are either withdrawing or refusing to drop below purchase price.

      and yet


      CoreLogic’s latest Pain & Gain Report, released last week, showed that 16% of capital city units sold at a loss during the September quarter – around the highest level since the late-1990s:

      I suggest that the proportion of sales that are forced sales, both in good conditions and bad conditions is misunderstood and underestimated. The CoreLogic writeup mentions that 10% of all dwellings sold for a loss in the the September ’17 quarter – roughly the last peak.
      One in six sales of units most recently were at a loss – presumably they were nearly all somewhat forced, but there would also be plenty of forced sales among the ones that still made a (nominal) profit.

      Assuming the trend in declining prices continues, many of the people refusing to drop below market price will have that option removed in different ways, some more painful than others, and will live to regret not meeting the market now.

      Buyers, on the other hand, always have the choice to not buy.

  8. We as taxpayers need to demand Cpt. Glenn repay his wages earned during his tenure at the RBA during the period rates were dropped to such ridiculously low levels, thus enabling and creating the preconditions necessary for all this to have occurred in the first place. If he has any moral compass he would pay it back.

  9. proofreadersMEMBER

    “Those who borrowed 90 per cent or more of the purchase price and then watched the street value of their dwelling fall 20 per cent plus (as has happened in Sydney and Melbourne small inner city apartments) are shattered.”

    Not as shattered as retail depositors who have been shafted at least 3% per annum over the last 5 years, so that Captain Glenn could create his immaculate conception housing bubble.
    Wonder whether Gotti has ever shed a tear for them?

    • That’s small beer compared to the extortion ate rent I have paid over 10 years, when I should have been able to buy if the RBA were not corrupt

      • mild colonialMEMBER

        Exactly. I will say over and over again, many of us have lived a recession already as savers and renters over the last 15 years.

  10. John Howards Bowling Coach

    Not just super recent buyers but anyone who bought in Southbank for example in the last 6 years is likely in negative equity. Contrast that with the ‘news’ of the value growth in the Melbourne market in the last 6 years…

      • John Howards Bowling Coach

        He was a very special unit. If not for politics he would have had to make a living as legal aid staffer. He certainly wouldn’t have been on ‘special comments’ duty in the Ashes series.

    • bolstroodMEMBER

      What is that speck on the horizon ?
      Is it a bird ?
      Is it a plane ?
      No … it’s a big Black Swan

  11. “Those who borrowed 90 per cent or more of the purchase price and then watched the street value of their dwelling fall 20 per cent plus (as has happened in Sydney and Melbourne small inner city apartments) are shattered.”

    so we’re down 20% already? woot woot. I thought it was only 10%? and if they think they’re shattered now, how about when another 20% off..

    • That’s not the only thing that’s shattered, I hear the glass on those balconies is also spontaneously exploding. Especially in this heat wave :).

  12. You know the funniest thing is that directly under this article is an ‘ad’ for …..’use your super to buy property’…..
    Is anyone actually doing this still? Surely not!

    • Not so much for residential property but it is still the go to strategy for doctors and dentists etc buying their business premises in their SMSFs.

  13. Those greedy off plan buyers who thought things were going to be soooooooooooooo easy, as property only ever goes up and I am sooooooooo clever because I bought off plan…. ouch! I feel for those who are genuine non speculator buyers – caught up in this thanks to the greed of others.

    • Remember all the warnings from anyone with half a brain reciting verbatum what has already happened in other countries and parts of Australia, falling on totally deaf ears…. money and idiots will never coexist for very long, ah?

  14. The next interest rate decision is going to be huge.

    Either a declaration by the RBA that the property market can burn (hold), or that the AUD can burn (cut).

    The luxury of fence sitting has finally been taken away from them.

    Gentlemen: it’s go time.

    • Just for the sake of discussion. I reckon they’ll opt for burning the A$. You’ll hear a lot of moronic rubbish frm the armchair media economists and academics about the floating A$ being the shock absorber for the economy. So no matter what happens it is all good!

    • My bet is that the RBA dramatically expands their CLF to keep the big 4 lending and the big4 abuse this by dumping their worst loans into these CLF facilities. End effect is not dissimilar to the Fed’s TARP (aka cash-for-trash) the quality of big4 bank bonds improves (they off loaded their rubbish) and they start lending again big time by the end of Mar 2019. All doable without the RBA changing their rates all very likely imho.

    • I agree. I think its probably the most important IR decision in a long time. They have two levers left in my view – lower IR’s and direct asset buying (QE) especially w.r.t securities normally financed by foreign capital. I suspect that they will definitely use the latter and the former (IR lowering) might be employed to stock sentiment although I don’t think that will work with Labor leading the polls.

    • “Chinese property developers have been cheated in Australia”. Great way to finance our CAD – you don’t have to sell anything if you are on the right side of the trade of people with money (they buy high and sell to you low). They will be scarred for a little while until we repeat the pump-and-dump scheme again – greed makes memories short. Sad that this is for an asset class that people actually need.

    • “But there is an element of truth in the Chinese authorities’ view that their big developers have been cheated by Australians.”
      LOL. I think he has that around the wrong way. Millions of Australians have been cheated out of homes by Chinese authorities allowing their citizens to go forth and buy up the world. The fact they paid stupid prices is on them.

  15. And to add to the pain, those strata fees and special levies are going to keep c0ming every three months. HAHAHAHA.

    • Yeah lost another post …

      At what point do the insurers decide to write the building off (also it seems there are questions raised about the quality of concrete used, not the steel used, in the beams. This is an entirely home grown ballsup it would appear).

    • mild colonialMEMBER

      Remember someone once explaining here why we had to keep the Australian steel industry going? The quality and the supply timing. What happened?

      • Mining BoganMEMBER

        Straya. That’s what happened. Straya.

        We gave up quality for quantity.
        We gave up standards for convienience.
        We gave up morals for money.
        We gave up honesty for fraudulence.

        This is Straya.

      • We gave up quality for quantity

        The “too soon shot one” had this slogan going a few years before his sudden ‘lead poisoning accident’: let’s make quantity a new quality

        As you might expect, it was a scheisse idea!

      • @Mining Bogan….
        🎶
        Did they get you to trade
        Your heroes for goals?
        Hot ashes for trees?
        Hot air for a cool breeze?
        Cold comfort for change?
        And did you exchange
        A walk on part in a war
        For a lead role in the cage?

    • There was a major structural collapse during the construction of a giant aircraft hangar at RAAF Fairbairn in 2003 with a dozen men hurt. It was eventually attributed to dodgy bolts that simply split and shattered under load. Much like any Chinese made fork, shovel, garden shears or any other metallic implement. They seem to think that steel is best made out of solder, or Blu-tac or something over there.

  16. Comments on Gotti’s article included this one:

    Heard an interesting comment yesterday. A friend looking to sell his house had paid out the loan with one of the major banks a few years ago. Yet the bank hadn’t released the mortgage “in case you want to get another loan one day to make it easier for you”. My friend has no loans, so it’s not securing any other financing arrangement.

    My thoughts on this is that they can claim my friends house as a high equity portion (against a closed loan), hence it improves the amount the bank can lend overall? If that’s correct, then the banking sector figures are much scarier than reported.

    • The LVR is used to calculate the risk weighting of the loan. Since there is zero loan, there is zero risk weighting. I’m struggling to understand how this would improve the bank’s situation? In fact, if the maximum allowable balance had to be kept on the record then the bank would have to allocate capital against an “asset” that isn’t paying anything, which would be a dumb thing to do.