“Not a question of if but when there will be a mortgage crisis.”
Real estate is local – until it isn’t. Cities have their own housing bubbles that implode on their own time. But once contagion spreads to mortgages and banks and infects confidence of real estate investors and homebuyers alike, and once debt levels are so high that they have become unsustainable and can’t be pushed higher, then a real estate bubble suddenly becomes a national economic issue with terrible consequences.
In Australia, which has the highest household debt in the world, “homes are so expensive that nearly half of all mortgages are interest-only.” They’re offered by the biggest banks with loosey-goosey lending standards. And “that is a red flag for imminent disaster.”
“It’s not a question of if but when there will be a mortgage crisis in Australia,” explained Jonathan Tepper, CEO at research firm Variant Perception, on the local 60-Minutes segment, Home Groans, that aired in Australia on Sunday.
He’d predicted the mortgage meltdowns in the US, Ireland, and Spain. And the one word that best describes the Australian housing market? “Insane.”
The flood of interest-only mortgages with sky-high price-to-income ratios is “a sign of Ponzi financing,” he said. And banks are now heavily exposed to these mortgages and any downturn in prices.
The video clip also features a young investor who was named “Australian Property Investor of the Year” in 2012 by a real-estate hype organ, and who now faces bankruptcy. She marveled at just how “easy to get” money had been.
“Banks only look at the balance sheets and the numbers,” she said. “They don’t see the emotional toll they have on people, and they don’t understand the social costs of their business practices.”
Prices have already crashed in some cities, including her town, Moranbah in Queensland, which the video presents as the canary in the coal mine for how the biggest Australian banks have moved to the outer edge of the cliff with their lending practices:
“Every day, we have investment banks and others telling us that the Australian housing party is over. Estimates for price declines over the next year or so vary from 7.5% to a plunge of 25%. Even the Reserve Bank of Australia is in on the act. But it is trying to put a positive spin on any downturn after having for years encouraged new house and apartment construction as being ‘good for the economy.’” Read… Australian Housing Illusion Set to Burst
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.