Tag Archives: Mortgagee In Possession

DISTRESS CAN COME FROM THE MOST UNLIKELY PLACES

When “Free Enterprise” gets it wrong, things can go pear-shaped quite rapidly.  Take the Brisbane Central Business District as a prime example – and if this goes as badly as I think it will, the effects will flow to surrounding areas like a cancer.

Buyers are gullible.  Who believes everything the salesperson and/or Developer tells them in their glossy brochures?    Well, the vast majority it seems.  People want a nice new shiny Apartment with a rental guarantee and massive capital gain to fund their retirement, buy a big boat and so on.  The promoters will say and write anything, as long as it comes with a Disclaimer as long as a telephone book (and about as interesting).

People do NOT do their own research.  Are they just lazy, or have so much money they can afford to lose $100,000.00 like dropping a $5 note on the ground?  Or is it that they really do not want to find out that they can buy far better value for sometimes 100’s of thousands less a few blocks away where it’s all established and happy?  Who knows?

The fallout from over 30 thousand Units/Apartments hitting a saturated Brisbane CBD market over the next 24 to 36 months will be catastrophic. This same thing happened here on the Gold Coast and was well publicised in the lead up, during and afterwards when folks lost their “investment” and their principal place of residence to the Banks as it was tied up as “security” for their supposedly bulletproof investment!

Prices of Apartments are falling – and fast – I would not be surprised to see discounting at the 15 to 20 percent range in the next 6 months.  Rents are falling much faster.  Apartments are sitting vacant for a couple of months, so cash poor landlords (many of whom have never had an investment property before) are going nuts at their letting Agent and saying “get me a tenant…at any price, as I am bleeding cash here!”

Well – there is your next problem.  Crap tenants.  Agents not only have to deal with a very large number of new Apartments to try and find tenants for, their time to check references is reduced so some very bad tenants will move in to new buildings and cause chaos.  Good tenants in the same building will cry foul and move out to get away from the drunken party animals, leaving even more apartments vacant and the cycle then spirals downwards.  There are many buildings here on the Gold Coast where the ratio of sole operator prostitutes to tenants in the same building is quite staggering!  Not to forget the Mobile Drug Labs!

As rents crash and buildings become full of rat-bag tenants, first-time landlords will “want out” so even more Apartments will come on to the market, adding to the glut.  These “distressed sales” will put more pressure on Developers, already staring at floors and floors of dead stock. Prices will “tank”.

When prices “tank” in one area, especially when you talk about tens of thousands of properties, the contagion rapidly spreads to surrounding areas as confidence falls.

I know I’ve been banging on about this rapid correction for a while now, but we are seeing the many and varied conditions required for a perfect storm, slowly but surely coming together.

Watch this space for when interest rates cycle upwards!

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HERE COME THE LOAN RESETS

Overheard a couple in their 20’s talking about Mortgages, so I waded in and told them a little of my background.  We chatted for a while and he pulled out a letter from his Lender.

$450,000.00 loan over 30 years at about ca. 4.5 or 4.6% INTEREST ONLY for 3 years, about to revert to PRINCIPAL AND INTEREST at >5.3%.  Neither of them had ANY IDEA what those terms meant or how it affected them, and they certainly did NOT understand why their Mortgage repayments were jumping from around $1,720 per month to $2,500.00 per month in a couple of weeks. NO IDEA at all.

Since they had borrowed through a Broker, she had had a baby and gone part time AND they had signed up for a brand new car at Dealer finance, which was not, in any way, a “friendly” deal as had been promised!

I brought up a Loan Calculator online and asked them what their circumstances were at the time they took out their loan.  OH DEAR!  The BEST I could come up with was $350,000.00, certainly not $450,000.00.  I told them about suspect Brokers who were inflating people’s circumstances, as well as Banks bad lending practices that were “setting people up for failure” down the track.

They got quite angry – not at me, but left, RAGE ON, ready to question  both Broker and Lender with the list of ‘please explains” I’d provided.

Here it comes folks – all these bullshit loans made before the Banks were forced to tighten lending criteria are coming home to roost.  This couple are screwed and will have to hand back their car, or sell their home.

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PRESSURE FROM ALL SIDES

Hi.  As we approach Christmas there are slightly alarming FACTS emerging around the country that point to a hefty correction around the corner for our teetering real estate market.

I guess the first one should be the USA’s impending decision to start to raise interest rates as they see their economy “recovering” somewhat.  The rest is happening here Down Under.  If we have a 2 percent rise in interest rates here, 40 percent of home owners will no longer be able to pay their mortgages – period – FACT.  That many properties flooding the market will start an avalanche of sales that I won’t be joining in to buy any time soon.  Not until the  streets are running a metre deep in Mortgage Blood would I get back into property.

Aussie Banks have tightened their lending criteria.  So many (foolish) people buy OFF THE PLAN – Why?  They stake their place with a ten percent deposit.  Come near settlement time, the Bank , after re-valuing most of these places says “Sorry – we need 20% deposit or NO LOAN for the rest”.  With most of these properties selling for OVER $700,000.00 who has a lazy $70,000 lying around?  Almost none of them so 1.  The seller sues and buyer loses deposit and equity in other properties etc or 2.  Buyer just walks away and leaves $70,000 behind and fingers crossed the Developer does not sue them for failing to complete.  Has this happened?  Yes – many, many times, especially here on the (fake tan – false Gods) Gold Coast.

When the Fire Sales start, whole suburbs will be revalued and lenders will eventually be forced to re-evaluate their portfolios and admit that most of their loans are under water.  Who of these battlers can come up with extra money if demanded by the Bank – ahhh – about NONE – unless Mum and Dad come to the rescue and put the family home up for security – in a falling market, this is a really DUMB IDEA!  But they will do it and the Banks will accept it – until the market corrects some more, and they ask for more equity and so on…until both properties are at risk of default.  Combine this scenario with the aforementioned rate rise “elephant in the room” and once again you can see why I am nowhere near real estate right now.

Things are getting tighter and tighter too – just look at the continued growth in credit card debt – bad enough at 18 to 22 percent per annum, but what about Pay Day lenders, who are raking it in – double the number of loans in the last year or so (average size about $500.00 I believe), with punters paying interest of over 100% per annum annualised!  If that does not point to a lot of people “losing the plot” financially, I don;t know what does.

Combine that Genius Financial IQ with previously mentioned factors and we have a recipe for disaster.

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EVEN GIANT BOND MANAGER PIMCO HAS A VIEW LIKE MINE NOW

Please take a look at this article –  http://www.smh.com.au/business/banking-and-finance/pimco-calls-on-banks-to-do-their-bit-and-raise-capital-20150428-1mv1ly.html

I rest my case – AGAIN!

If you’re a property owner – get out NOW, put your money away, rent and wait til the bubble burst-eth!

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THE ELEPHANT IN THE ROOM

Sydney Morning Herald today – all credit to them for this article – thanks ladies and gentlemen….

I continue to argue to all who’ll listen, that this rate cut is just fuel to a fire that will burn a lot of people when it finally rages out of control.  What is not reported is the high number of people who are diving into this super heated market who are not sophisticated investors. I recently chatted with a young couple at a Cafe who I overheard talking about buying a house.  Their SOLE source of advice – their blue collar, working class parents who owned precisely ONE HOUSE between them, bought 20 years ago!  And of course their “friendly” Broker who had given some really awful advice, far outside his legal ability to do so.  I left them pretty sure they were going to buy a nasty house in a nasty street and a nasty suburb for a “top of the market” price and rue the day they did.  This scenario is repeated hundreds of times a day all over the country.

Let us not forget the dodgy companies who still prey on people’s fear and greed to “stitch them up” into overpriced negatively geared properties with “rent guarantees” and other incentives paid for out of their overpriced purchase.

And, of course, our crazy overseas buyers who, in many cases, just want their money out of their “old” country and into the supposedly “safe haven” of Australia.  These people are losing all sense of propriety and in certain sectors of the market are causing chaos.  This chaos filters down and sideways into other sectors, fuelling speculation, rumour and fear that others may miss out on an endless bull run, and greed for the capital gain that, in my not-so-humble opinion, will never eventuate – or if it f does, will be short lived….

Sydney Morning Herald, today —- A deteriorating economic outlook sparked the latest interest rate cut, but the Reserve Bank remains concerned about the continued strength of house prices and investor activity in some pockets of the housing market.

The minutes of the RBA’s February meeting, released on Tuesday, show the board decided to cut Australia’s cash rate to a new record low of 2.25 per cent after new figures revealed the economy wasn’t doing as well as was previously expected.

But the bank also remained concerned about the continued strength of the Sydney and Melbourne housing markets.

“Housing price inflation had moderated from the rapid rates seen in late 2013, but remained high and in Sydney and Melbourne had been well above the growth rate of household income,” the RBA said.

The RBA said growth of investor credit had continued to increase “at a noticeably faster rate” than owner-occupier housing credit.

And a range of indicators suggested further growth of dwelling investment in the near term, the bank said.

The RBA said it would keep a close eye on developments in the housing market, as well as the impact of moves late last year by the Australian Prudential Regulation Authority, designed to temper investor activity.

“Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets, members also agreed that developments in the housing market would bear careful monitoring,” the RBA said.

“They noted that it would be important to assess the effects of the measures designed to reinforce sound residential mortgage lending practices announced by APRA in December.”

Despite the housing concerns, the RBA said it decided to cut the cash rate after indicators of economic growth began to look weaker than it previously expected them to be.

Economic growth was expected to pick up later than the RBA expected, while unemployment looked set to peak higher than originally forecast.

The central bank also took another swipe at the Australian dollar, repeating its familiar line that “a lower exchange rate was likely to be needed to achieve balanced growth in the economy”.

The RBA said it had considered acting at the March meeting instead but decided to cut in February, giving the opportunity for more detailed communication of its decision in the quarterly Statement on Monetary Policy, released three days after the February 3 meeting.

“On the basis of their assessment of current conditions and taking into account the revised forecasts, the board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand,” the minutes said.

END OF ARTICLE

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SYDNEY MORNING HERALD COMMENT – 13 FEB 2015

http://www.smh.com.au/business/rba-waves-red-flag-over-very-concerning-sydney-property-market-20150213-13eakh.html All you have to do is read what the Reserve Bank of Australia is now worried about.  Thanks to the Sydney Morning Herald for providing this story. I keep saying to all who will listen that this market is completely MAD, rising with no fundamental except for some perverse notion of “affordability” espoused by Lenders of all shades. Youngsters with massive mortgages, underpinned by guarantees and liens taken over their parent’s family home will pay the ultimate price when this House of Cards comes crashing down.  They do not realise that a 2 percent rise will mean their repayments will rise 50%, never mind the tens of thousands who currently enjoy interest-only honeymoon rate loans that will, over the next 12 to 18 months, revert to Principal and Interest at a rate significantly over market. I’m so glad I’m leasing right now, on the side lines and watching this unfold.

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YET ANOTHER PERSPECTIVE THAT ITS ALL GOING PEAR-SHAPED

Housing leverage hits a record high  an article by Article by RP Data senior research analyst,
Cameron Kusher

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

When you look at the key driver of the increase in the ratio, it is no real surprise that leverage in the housing market is the major driver. As at June 2014, 137.1% of the 151.1% total household debt figure or a record high 90.7% was housing debt. In fact the 137.1% ratio of housing debt to disposable income is a record high and up from 136.1% the previous quarter and 133.3% a year earlier. As was the case with household debt, you can see that housing debt was relatively unchanged for a number of years but has recently started to rise once again.

 

The RBA breaks this data out further to owner occupiers and investors. Of that 137.1%, 90.9% (or 66.3% of the 137.1%) was to owner occupiers with the remaining 46.2% (or 33.7% of the 137.1%) to investors. The proportion of overall housing debt to owner occupiers is trending lower at the moment while investor debt rises.

The data also includes information on the value of assets to disposable income. According to the statistics, the ratio of total household assets to disposable incomes is 801.9%. This figure is now at its highest level since March 2008. This 801.9% is split into housing assets which account for 433.6% and financial assets which make up the remaining 342.2%. The housing assets figure is at its highest level since June 2008 while the financial assets figure is lower over the quarter, down from 342.9% in March.

 

The chart highlights the trends over time. What they indicate is that households have consistently stored a majority of their wealth in housing assets as opposed to financial assets. Unfortunately the data is not available prior to 1988 so we don’t have visibility on the results prior to that time.

Chart 4 looks at the annual change in the ratio of housing debt to disposable income plotted against the annual change in combined capital city home values. Although the ratio of housing debt to disposable income is rising it is doing so at a much more moderate pace than it has in the past despite quite strong growth in home values. It is difficult to know exactly why this is happening however, the RBA has reported in its latest Financial Stability Review that the typical mortgagee has more than 2 years’ worth of mortgage repayments sitting in mortgage offset or redraw facilities. This may go some way to explaining the moderate rise. Alternatively, a rise in foreign buyers could also be a contributing factor. Other potential reasons include lower loan to value ratios or investors purchasing using significant equity in their principal place of residence.

 

The data highlights that household and housing debt is increasing and with home values continuing to rise we would anticipate a further rise in both measures over the coming quarter. The RBA has previously stated that further increases in household debt are not ideal. With housing debt at a record high level and investor activity at near record highs, I don’t think it is any surprise that the RBA is looking to macroprudential tools to take some of the heat out of the housing market.

 

You don’t need the charts – the words tell it all.  Be very careful folks…

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IMF IN 2013 WAS WARNING US

21 Nov 2013  ABC Business News in Brisbane – The International Monetary Fund has cautioned that the recent surge in Australian property prices and rising investor expectations could cause values to “overshoot”.

While the IMF does not point to a property bubble in the hot markets of Sydney, Melbourne and Brisbane, it is urging regulators to scrutinise property investment to ensure banks maintain strict lending standards.

“Attention should be paid to the risk – as in any situation where asset price inflation accelerates – that a prolonged period of rapid price growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting,” the IMF said in a statement.

“A sudden house price decline, were it to occur – possibly triggered by a shock to household incomes and borrowing costs – could reduce consumer confidence and impact overall economic activity.

“The authorities would need to be prepared to take preventative actions if household credit growth, transactions volume, and prices accelerate.”

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CONFIRMATION

Full credit to Australia’s ABC News for this one

The international body that represents central banks has released data that puts Australia near the top of all measures of overvalued housing.

In its latest quarterly update, the Swiss-based Bank for International Settlements (BIS) has published extensive historical analysis on historical home prices in a large number of countries for which reliable data is available.

Confirming a recent analysis by the International Monetary Fund, the BIS has found that Australian home prices are higher than they typically have been when compared to rents and incomes.

Despite having had no real (inflation adjusted) property price growth over the three years up to when the BIS figures were taken at the start of 2014, Australian homes had the equal fourth highest price-to-rent ratio and second highest price-to-income ratio.

Australian home prices were 50 per cent higher than usual relative to rents, and around 40 per cent higher than usual when compared to incomes.

“A priori, this could be a reason to expect a price correction in the future,” the report’s authors cautioned, referring to countries where prices were more than 20 per cent higher than these historical averages suggest they should be.

In the months since the figures were taken, Australian home prices have increased much faster than both rents and general consumer price inflation, meaning that they would have deviated further above these historical norms.

The BIS analysts warn that these types of price rises in already overvalued markets increase the risk of future declines, especially where wages are not growing strongly –Australia has recently had wage growth that has failed to match inflation.

“This might lead to a reversal or moderation of recent growth or a further sliding of prices,” the BIS warned.

“This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate.”

The BIS has also compiled data that look at house prices back to 1970, with Australia’s current index reading of 200 second only to Norway’s growth over the past 44 years.

Out of the 14 advanced economies examined by the BIS, only the UK has house prices that come close to matching Australia and Norway for inflation adjusted growth over that period.

Recent Reserve Bank research showed that it was likely that most Australians would be just as well off, or perhaps better off, renting than buying at current home prices.

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IS EVERYONE WRONG?

take a look here – http://www.imf.org/external/research/housing/index.htm and here -> http://www.abc.net.au/news/2014-06-12/janda-its-official-property-prices-are-getting-out-of-reach/5517674

When things are this HOT for this LONG, something is bound to give..

If interest rates take a spike here, watch the fallout.

DO NOT BUY PROPERTY AT THE MOMENT.

IF YOU HAVE SOME AND ARE NOT AFRAID OF TAKING A 30-40% HIT, THEN SIT TIGHT….OTHERWISE, SELL UP AND RENT FOR 2 YEARS THEN BUY YOUR OLD PLACE BACK AT A BARGAIN PRICE…

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