Subprime Home Loans: Will Australia have a US style meltdown

The US subprime meltdown occurred in 2006 to 2008, now people are saying that tAustralia is in a position for it to happen here

Many are saying that Australia is headed for a sub prime mortgage crisis similar to that in the US. I don't buy it. I don't believe that there a case for this to happen here. On many levels Australia is much better positioned.

Here's my view on Australia's Sub Prime Lending position

1. Australia has a better industrial relations and minimum wage support structure. So having people work for peanuts does not happen here like it did in the US. Many of those workers applied for and got sub prime mortgages.

Australia has a booming labour market that is stable

The US does not have anything like our labour market 3 years on. Things have not improved on the unemployment and wage front for two years in the US.
Our home values have trended down for three years, with occasional spikes in some centres reflecting stimulus related demand.

Australian property prices have moderated

Our property prices have trended down to a soft landing and only those that bought at the top of the property market are looking at taking a loss, if they sell.
I agree that homes in Australia may still have some way to fall, but sub-prime lenders have to front with usually 20% deposit or more, so they are going nowhere.
The US experience was different
In the US, property values soared then crashed on the basis of bad loans, not sub prime lending. many people had 120% loans.This is an entirely different situation than an 70% to 80% lend.

Mortgages work differently in Australia

In Australia, we are tied to the loan, but in the US, homeowners can walk away anytime and send the bank jingle mail. They don't suffer the same consequences as they would in Australia. So Australians are less likely to walk away from their loan or their property.

The US Equity Home Loan

The other problem that the US had was that people were using the equity in their homes as an ATM to buy cars and other big ticket items, so they were at the hilt of loan to values, before their home values collapsed.
A few people do this here also but usually to a value of 80% lend, plenty of buffer for a downturn in home values.

Mortgage loans disappeared in the US

The US lost 40% value over night, because mortgage loans went from abundant to scarce overnight.
Many homes in the US lost 75% percent of their values. Most lost 40%. Many because their financial system was broken.
 Only places like San Francisco and New York did not see these numbers in loss of house values.

Credit risks were ignored in the US

The sub prime lenders in the US also lent to people that they knew could never repay the loans.
That has not happened in Australia, and even with low doc home loans, the borrower has a cash flow.
People that are credit impaired can get home loans, but higher deposits and higher rates are the norm.
The Pool of Sub prime lenders in Australia id much smaller than it was in the US
Our sub prime market is also a lot smaller in Australia than it was in the US.
I agree that if we get two more rate rises this year, then we may see less buyers in the market and a lowering of property values.

Our foreclosure rate says we don't have a sub prime lending crisis in Australia

Our foreclosure rate in Australia is tiny compared with the US
In the end we don't have a sub-prime crisis in Australia, because lenders have tightened their lending criteria.

We do have an Housing Affordability Crisis.

We do however have an affordability crisis, and this means that less and less people can afford to buy a home. It also means that less people can get a loan and get into financial difficulties by over paying on property like happened in the US.

Governments in Australia need to bring the cost of land lots down.

So yes, the government have to do something about that, and the root cause in land prices, Lower the cost of land by over $120,000 per block and affordability will return and house prices will soften further.
This means that the RBA can put interest rates up further and it won't hurt like it does now, because the borrowing will be lower.
Author: Rick Adlam Mr Mortgagehttp://www.mrmortgage.com.au

Housing Market: Mortgage Brokers are asking what happened to the housing shortage?

Falling home prices and home sales tell me that the housing shortage has evaporated. Mortgage loan demand has tanked with it. So what happened?

Four years ago the HIA claimed we had a housing shortage of 80,000 units. Rents were growing and people were on waiting lists. Home Builders had and field day and so did mortgage brokers financing both homes and investment properties. Things were good.
By late last year the housing shortage had ballooned to "120,000", then 180,000 this year and was tipped to reach 200,000 homes needed to satisfy our need more homes and units by years end.

Who stopped the mortgage merry-go-round?

Most of these claims have come from the Housing Industry Association. They are echoed by real estate agents everywhere as the reason you should buy now, the best reason to sell now.
When you go and see real estate agents they tell a different story. My local area in Ormeau, has had a slow and steady rise in real estate prices for the past ten years, until late last year. Then the the last mortgage interest rate rise cut in and people stopped buying and the music stopped for the real estate merry-go-round.
I asked one of the local real estate agents what was happening to real estate prices and we had had a 10% drop in the Ormeau [North Gold Coast] area. The first drop in home values I had heard on since moving here and building anew home in 2002. Homes were selling, but not at Ormeau's solid and brisk pace.
Nice homes on large level and elevated blocks, with wide tree lined streets. this is a lovely area.

Where are the home shortages, and the mortgage business potential that goes with them?

The issue is not so much the Gold Coast but the general theme of housing shortages which dominate the property industry talk and the HIA spin nationwide. It's a grave concern to mortgage brokers

Vacant Land Sales down to the lowest levels since 1994

Mortgage brokers that haven't been seeing too much vacant land mortgage loan deals come their way lately may be interested to know that Land Sales are at the lowest level they have been since 1994.

The January floods would not have helped sales any, but the Queensland floods never affected the Gold Coast at all! So we have to conclude something deeper is happening.
According to a recent report on the Gold Coast we have 13 months of land supply at the current sales rates. So land shortages are out the window when we look for a reason for low new home sales and construction loans that go with these building contracts.
The same is true for "House and Land" sales. They are just not happening.
Lan developers on the Gold Coast say that land production over the next 12 months will reach 2455 lots. This is twice the current level of annual demand. Something will have to give.
Remember that next time you hear the Housing Industry Association or the Master Builders Association complaining about the lack of land sales or new house sales.

Boomtime with lower Home Value = oversupply

We are in a boom time, make no mistake. So the only reason that we would see home value declines is a homes for sale glut. Home buyers can pick and choose all month long and wait for prices to fall further.
The number of dwellings for sale is at its highest levels since early 2009.

Why have land sales plummeted?

There is a current lack of demand for land. I believe I have the answer to this one. Block sizes. Land developers have been cutting the size of land lots now for ten years and the prices climbs ever higher.
People are just nor seeing value in buying land that is smaller than to cam buy already built on.
As the established home prices fall, why would anyone buy a smaller block and build a smaller home and wait 12 months to move in when they could buy a finished home now that is bigger and better for less money? Your are right they wouldn't.

The biggest boomtown in Australia is Perth, but land prices are falling there too.

Land sales dropped 27 per cent in Perth in the December quarter, while average prices fell 3 per cent.
Such things do not occur amid a "chronic housing shortage crisis".
There's certainly no shortage in Adelaide, where vast areas are being opened up for new development in the north of the city.
The over-supply of building land is a fact in Western Australia Australia's boom State and in Melbourne. Victoria, Australia's biggest home market.

Mortgage Brokers need to think Refi

Mortgage brokers will have to become proactive in writing mortgage loans and should look to the mortgage refinance and home equity loans to grow their business. Home buyers and new home builders will be thin on the ground for sometime to come.

Property sales : Has the dead cat bounced in Australia's property mearket?

Property sales : Has the dead cat bounced in Australia's property market?

Property sales across the country have slumped to their lowest level in 10 years. despite rising sales in Melbourne, and some upturn in Sydney's housing market
Figures from RP Data show sales of houses and units dipped 20 per cent in 2010 on the back of a number of interest rate rises, and falling demand for other reasons too I suspect.
Darwin Brisbane and Hobart all recorded lower home sales activity, with Sydney leading the way.
The "dead cat bounce" analogy
Home sales fell last year to below those recorded at the height of the global financial crisis in 2008. That was when the rest of the World had a major correction in house prices and Australia missed that bath. Hence the dead cat bounce comparison.
Whilst we have seen several raises in mortgage interest rates, they are hardly a concern at average mortgage rates we have and full employment, so my guess is that house prices have got ahead of themselves and until they soften further we are unlikely to see an upswing in home buyers any time soon.
New Responsible lending laws
One thing that people are not talking about is that from January 1st, 2011, banks had to be more diligent in the lending due to new responsible lending laws taking affect.
The fact is that new land on the Sunshine coast is so over priced that lenders may be reluctant to fund the silly prices being asked for blocks of land, on the basis that the market may well soften further and they would be caught holding the baby.
This is besides the fact that the borrowers may have a hard time meeting the repayments. It may becoming easier for bank managers to say no to loans, as the big banks are loaded with mortgage borrowers who have equity in their homes and the ability to repay the loan. Why pick up new business that does not meet that criteria?
You may have noticed that the ads from the big home builders and the developers have suddenly stopped. They are not into throwing good money after bad, and the developers may have to start thinking about discounting their land if they want to offload the land that they have going unsold.
First Home Buyers an extinct species
Over priced land has killed off the first home buyers in the new home sector. Decades ago cheap land was the spur that meant that first home buyers usually bought house and land in the sticks. Well that does not happen anymore.
And the problem is that second home buyers wanting to move up want a decent lot size. That won't happen under $300,000 on the Sunshine Coast. So since when was residential land worth over $2 million dollars an acre? Since Stockland and Delfin monopolised the residential land development market it seems to me.
All was fine whilst the Labor Government propped up sales with trebling the first home owners grant to stimulate first home buyers into building a new home. Well that has stopped and as usual, the price of everything rose to the level that people could afford with the grants. Take them away and the party is over. Isn't this what has in fact happened?

If the Government wants to get people into new homes, and get home prices down, it needs to take control of land sales and development.
Without new players in the home loan markets, expect to see mortgage business drop and the return of refinancing and debt consolidation in the mortgage broker sector.