ABC 7.30 Report does negative mortgage equity

Digital Finance Analytics’ principal analyst, Martin North, appeared on the 7.30 Report last night where he and Stephen Koukoulas (‘The Kouk’) debated the threat of negative equity as Aussie house prices fall:

New data from Digital Finance Analytics has revealed there are 3,900 households in this post code, where the owner has a mortgage higher than the property’s current valuation.

It’s a predicament being felt around the country.

Andrew Pennisi has been selling houses in the Carlton and Essendon areas of Melbourne since 1988.

In recent months he’s seen neighbourhood prices take a dip and some of his clients are feeling the pinch.

ANDREW PENNISI, PENNISI REAL ESTATE: It’s heartbreaking. I think people invest because they want to improve their life.

It doesn’t really cross their mind that they’re investing and losing money.

There’s certainly some people that have stretched themselves a little too far, that are obviously — have concerns because they potentially, could end up in a situation where they have negative equity.

Certainly have sold properties in the last 12 months where we’ve had clients who have sold less for what they paid.

MARTIN NORTH: I think if you ask most households they’ll say house prices can only go up. And of course for the last few years that’s been true.

But unfortunately things are now looking rather different.

MICHAEL VINCENT: Analyst Martin North runs his own housing data firm and warned about the property downturn before the slide began.

He says if a home buyer loses their job or has another life shock, such as a death in the family or a divorce, that’s when negative equity can really bite.

That becomes a massive debt burden?

MARTIN NORTH: Yes.

MICHAEL VINCENT: His own research found there are thousands of houses in Sydney, Melbourne and Perth that are worth less than what the buyer paid for them.

While the Reserve Bank’s data doesn’t match Martin North’s pessimistic findings, it does show a stark national divide.

15 per cent of loans to owner occupiers and investors in WA and the Northern Territory, are in negative equity.

In Queensland, driven by drops in regional areas, it’s almost 5 per cent.

But in New South Wales, Victoria and Tasmania, negative equity accounts for less than 2 per cent.

STEPHEN KOUKOULAS: The critical thing for any homeowner is whether they have a job. If you’ve got a reliable job, job security and even if you’re getting a modest 2.5 per cent pay rise each year, you’re going to be fine.

MICHAEL VINCENT: Economist Stephen Koukoulas has a much more optimistic view of the housing market.

STEPHEN KOUKOULAS: If you look at some of the bad debts or loaners – that is people falling behind in early payments – they’re actually tracking near record lows.

MICHAEL VINCENT: Stephen argues that with 600,000 more migrants expected to arrive over the next two years, there will be plenty of demand for homes. He also believes that with the banks raising the bar on home loan applications, there will be fewer bad loans in the future.

STEPHEN KOUKOULAS: You’ve got to clear more hurdles in terms of proof of income and importantly proof of expenditure, to confirm that you’re going to be a viable customer.

MICHAEL VINCENT: Both Martin North and Stephen Koukoulas believe any downturn in the economy will force house prices lower.

STEPHEN KOUKOULAS: There is a risk that we do see a hard landing and this fall in house prices feeds into concerns about the economy.

MARTIN NORTH: We are seeing negative equity now based on local conditions here. If in fact we got an international impact as well coming in for example the US, China or Brexit, that could actually drive prices further south and that would actually make negative equity worse in Australia.

On his blog, Martin North noted that The ABC omitted some crucial parts of his analysis:

They missed two important points I made in my interview, first my data is households not loans, and second the falls in value should require banks to mark to market their portfolios.

The maps can be seen here. This video walks through the mapping in detail.

Comments

  1. GreatRavensGhost

    Ahhh the kouk. The poster child of insulin resistance. Considering the link between insulin resistance and dementia I would suggest the the kouk has literally lost his mind.

    • The Kouk is right when he says “600,000 new migrants in the next 2 years will keep prices from falling”.

      Labor will probably “open teh gates” to more than that. You might not like what he says, but it is true.

      • GreatRavensGhost

        those immigrants are going to have to qualify for a loan first.

        good luck with that.

      • No they won’t need a loan. They can live 4 to a room. An Aussie specufestors can get the loan and collect the $800/week rent.

      • At four to a room you might need more than 600k.
        Employment is key, if it continues to hold up, immigrants will continue to come, prices will be more stubborn than otherwise.

      • Those new immigrants can’t afford property … They come out of their shitholes to our wealthy country so that they can live a better life …. in the caravan park!

    • Lol. But is that the same Stephen Koukoulas who’s “Australia’s leading economist & speaker”?

      Because it says so right here:

      https://thekouk.com/

      And more:

      “Stephen Koukoulas is Australia’s foremost speaker on economics on a national and international level.”

      When someone self-promotes their own greatness memories of John Howard’s bowling prowess come flooding back:

      https://www.youtube.com/watch?v=0o8by05rtMY

  2. “I think people invest because they want to improve their life.”

    And there I was thinking it was lazy, greedy people who wanted to get ahead by doing absolutely f*all productive for the economy or society. Thanks for clarifying.

    • HadronCollision

      Welllll plenty probably do invest to improve their life.

      Let us not conflate anger at the ponzi and specufestors with those with genuine intent

      • I apologise to all those who invest with honest intentions 😉 but let’s be frank: absent all the immoral incentives offered up by Govt to the investor class and the inflationary monetary system, mom ‘n pop investors would be few and far between, if exist at all.

  3. Is the Kouk suffering from paid cognitive dissonance? He Stated something along the lines that as long as people have a good job and get pay rises of around 2% then negative equity will not be an issue. He is right in that if this happens that will be the case BUT there has been hardly any wage growth over the last decade, lots of tradies are about to struggle finding work…..

    Its a bit like a lifesaver at the beach when he sees someone drowning, standing up and saying there is no reason to act because if they keeps their head above water and keep breathing they will be OK.

    • HadronCollision

      what is the number of people who are in unionised workplaces or public sector with mandated 2.5% pa or higher increases and permanent employment.

      • Commonwealth public servants have had bargaining parameters of max 2%pa wage rises for at least 6 years now. Given the delays it took to get a significant number of enterprise agreements over the line that effectively become 1%pa wage increases.

        The hypocrisy of the govt with their outlandish wage growth expectations in the budget writ large

      • ADF have been getting 1.5% and being told what a great deal it is and how lucky they are. APS have complained that ADF are getting actual pay rises. Who is getting 2.5%?

      • Not sure, it cant be very high considering the overall rates of wage increases are low but for arguments sack lets say its 20%…. How many businesses will lay off staff to accommodate the 2% mandated rises? Considering official inflation figures dont include the most inflationary items then even 2% is probably not enough.

        As for unionised / public service rate.
        150,000 people in the APS and about 400,000 NSW PS, 300,000 in Vic. So probably all up 1.5 Million out of the total 12 Million employed people.
        Most Unionised workers outside the public service are in the Food service and related areas. SDA is the biggest union covering that and they have a history of supporting the business over the worker and in a few cases screwing the worker.

        If you have 10 employees, business has gone backwards and you cant meet your 2.0% wage increases what are you going to do? Probably sack one employee and hope the rest can pick up the slack. Its better that than have to sack them all in 6 months.

        Good luck relying on the 2.0% pay rises and a stable job when the flow on effects of all the newly unemployed starts to flow through.

      • kannigetMEMBER

        My take was you implied the number of union and public service jobs who had 2.5% pay rises locked in was high enough to prevent it being an issue.

        OK, if I have missed the point could you enlighten me.

    • “Its a bit like a lifesaver at the beach when he sees someone drowning, standing up and saying there is no reason to act because if they keeps their head above water and keep breathing they will be OK.”

      LOL, its like saying jumping off a cliff doesn’t do any harm, hitting the ground does.

      But then again, much of Straya’s current predicament comes from not thinking just a few steps ahead.

    • Even if people were getting a couple of percent it is eroded by inflation. Real incomes are in decline and will continue to decline. Making it a challenge to support current living standards.

  4. I think the kouk is being disingenous to say that even in a falling market job security will remain positive and the numbers of people coming to Australia will continue at record levels.

    As property prices fall work in the construction sector will contract (evidenced by that big beachside development in Perth getting pulled, and I was told yesterday a major residential project in southern Canberra has also been pulled a couple of years units in it were sold off the plan) and the construction sector is a major employer in Australia.

    And you cannot argue that rising house prices have a clear wealth effect and not acknowledge that falling house prices will have an even bigger negative impact (we fear losses more than we appreciate gains).

    Also Adul Rizvi, who was in charge of the immigration program under John Howard, said that there is clear evidence that migration numbers drop whenever the economy begins to struggle.

    The kouk is ignoring that the virtuous circles that have been in place as house prices rose will be replaced with vicious circles as the housing market declines.

    edit: +1 kanniget

  5. Hill Billy 55MEMBER

    The two things that the optimists miss is that there are approximately 10% of housing in Australia empty at present. Some are holiday homes, but there has been a significant increase in homes in more desirable areas that have been purposefully left vacant. The second problem is the impact of dual family living. This ballooned in the USA after the GFC, and will similarly here in any employment driven down turn. As local employment tracks south (only so many NDIS positions to be filled), these things will exacerbate the price falls.

  6. SoMPLSBoyMEMBER

    “It doesn’t really cross their mind that they’re investing and losing money.”

    Dunno ’bout that- maybe?
    Heretofore, house prices were ratcheting upwards quickly and majestically and that was all that seemed to cross anybody’s mind. Was a simple process: press seed into ground, wait, then harvest bumper crop. Repeat.

    I’d suggest that >99% of those that borrowed and bought entertained the thought that ‘all good things must have an end’ but hoped the ‘end’ would not be for some time yet.
    Straya ‘is’ different all righty( re: the fable property only goes up); we’re happy and content to smugly presume we’re different right up to the point when we can no longer deny we’re not.

    • HadronCollision

      There is a lot of apparent certainty about the proportion of these investors that, according to readers, invested with no due regard to down side risk.

      >99%, I mean really?

      I don’t have data to challenge that, but it doesn’t pass the parliamentary chair sniff test to me

      • Every bubble has two elements of fear and greed. Compared to other bubbles like tulips or dot.com stocks, the element of FOMO is stronger in a housing bubble.

        Regardless of the composition, a bubble will keep inflating until it can no longer, that is, until it exhausts bidders.

    • innocent bystander

      think ya wrong boy
      for years I asked Perth speculators I knew what would they do when the downturn came
      either a) no answer or b) sell
      of course now Perth is there their answer has been (unless forced to sell by bank, rare)
      HODL

  7. “the falls in value should require banks to mark to market their portfolios”

    Should = wont. If Banks were doing this they would already be cutting dividends and raising capital to maintain their capital requirements.

  8. Professor DemographyMEMBER

    None of us know exactly what will happen but there seems to be a growing consensus that we are increasingly playing a very finely balanced game now. Even the most insulin replete and highly medicated commentators are talking about the minute factors that will hold this all together but only to keep it from slowly or quickly crashing our economic ‘model’.

    • Ideological types can’t back off – and the greedy never have enough. Put them both together as a team to drive ‘the economy’ you can be certain that this will play out to the bitter end. Throw in a happy clapper who’s been waiting for the Rapture and it could not be more symbolic.

      You’re correct – other than window dressing there is not much holding us together as a nation now – it has been eaten by the battery acid of identity politics working hand in hand with neoliberal social vandalism. When governments permit the flogging off of amenity, whilst driving down quality of life, whilst chanting ‘diversity’, a tipping point will be reached. Abandoning democratic processes to determine the character of a nation, giving preference to a nasty elite aided by useful idiots, will cause it all to blow. The ALP will turn the heat up. This suckers going nuclear.

      I suspect some of the ANU ideologists have begun to realise that prodding a muzzled bear is only as viable as the quality of that muzzle. Anger builds in silence and when the leather snaps it releases a rage that cannot be controlled. Perhaps Dr Liz will then get the sort of ‘conversation’ she’s been after?

  9. Props to Martin North for his calm, measured approach on this in front of the camera. I think deep down he knows it is going to be houseaggedon. I would not have the patience to keep my sh!t in check.

    • Mining BoganMEMBER

      I like Maggie who says money is her tenant’s entire motivation.

      I wonder if she could explain to me just why she bought an IP. To meet Reusa maybe?

    • >An investor with three units lost up to nearly a quarter of her weekly rents. For her two-bedroom unit on Level 17, she agreed to reduce the weekly rent to $400 from $515.

      > “I can’t let myself go bankrupt,” she said. “I have to do something. My family has been helping with money so that I can continue to pay the mortgage.

      Cry poor with 3 IP units? Not that I doubt her being on the edge of bankruptcy but really… a 4 month 25% reduction in rental income has brought you to the brink? You can’t afford them then and you’re already bankrupt, you’re just taking your family with you.

  10. I do luv martins dress attire, sorta looks like he maybe has some bodies buried under his house…put the ointment in the bucket stuff..

  11. “They missed two important points I made in my interview, first my data is households not loans, and second the falls in value should require banks to mark to market their portfolios.” Further to this, would the councils do the same on valuations to rates if prices really crash? Or do they just keep up the gouge and reduce services as they do now while paying themselves ever increasing sums?

    • Jumping jack flash

      We know the answer to this:
      Rates are set by the council to whatever amount is required to pay themselves enough to acquire as much debt as they require.

      Its pretty much the formula that is used by any provider of an essential good or service.

    • In the house I rent, the valuation went down, so the council added a levy so the rates were just a little more than last year.

  12. LOL I watched that last night from a few seconds in and I thought I’d missed half of it. Turns out it was that short.

  13. A housing market is a funny market. It is narrow, fragmented, slow moving and crowded with amateurs who cannot even spell “bubble”. Since the volumes are much thinner than in a stock market, a single crazy bid at an auction can lift the whole local market.

    But the opposite can also happen. A single desperate seller dumping his stock can set a new price for that street or suburb and bring the whole local market down.

    • HadronCollision

      We’re looking to move/downsize and where we’re looking it’s interesting to see what some vendors want. Lot of variation in price and quality in pretty similar stock (land size, bedrooms, bathrooms).

      I hope we don’t have as much trouble as Gavin!

      On the plus side, we’re not in Mel/Syd and our market is pretty good

    • Jumping jack flash

      Aah yes, the lazy property valuation system we use which was fundamental to enable debt to generate itself and then minimise its own risk as it was created and attached to properties. Without it we wouldn’t have all this problem now.

      But then we wouldn’t have had the ability to produce infinite growth using infinite debt, and no instantaneous, effortless riches using someone else’s debt obligation.

      But you’re right, when it falters and all starts coming down…

      If we had a logical system, a checklist, for evaluating properties and setting prices it would have much more stability. This kind of system has its problems, it can be hacked and subverted, and people will think it is unfair, but at least it is consistent and houses can only rise in price as actual value is added (+ CPI), and not just because a ton of easy, nonproductive debt was created by a bank somewhere and plonked onto the house down the road.

  14. How’s Leigh Sales opening remarks – she completely butchers the definition of negative equity …. you had one job Leigh, one job!!

      • It seems to me that about 50% of sub editors don’t know the correct meaning of mortgagee and mortgagor, and mix up the two terms.

        Mortgagee = bank.

        But hey, as long as they don’t get that key message about migration being good for the economy wrong, it’s all good, right?

      • innocent bystander

        really?
        I stopped watching cause I thought she was useless
        that was 6 months ago tho.

  15. Jumping jack flash

    “…job security and even if you’re getting a modest 2.5 per cent pay rise each year, you’re going to be fine.”

    Fine, yes, from a debt repayment point of view – and only at face value. But everyone knows that 2.5% is the CPI, not cost of living which is usually much higher due to the debt gouging of the supremely gougable essential items for sustaining life.

    And as others have pointed out, workers are lucky to get anywhere near a 2.5% payrise these days, so these comments from these intellectual giants mean pretty much nothing – they’re just a string of memes and buzzwords to placate the masses who were well and truly fooled, and are now being relentlessly pounded by the banks, and with no lube either.

    Unless you’re in the fortunate position where you can replace all your existing workers with a couple of cheap imports and take home the difference, or unless you’re lucky and can find a job that does pretty much the same thing that you’re skilled at and pays a little bit more, then you’re pretty much stuck with whatever you’re getting now for the foreseeable future.

    Just pause a moment and consider the poor, poor fools who were tricked into taking on interest only loans!

  16. Imagine the people who have had to sell an thought they made a small profit and/or broken even and think they did well, forgetting the thousands in stamp duty and mortgage payments, then again thy probably did do well (compared to the others that is) Although not everyone is suffering, prices in our area have risen around 20% over the last 12 months.