Signs of Mortgage Meltdown in Australia

“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

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  52 comments for “Signs of Mortgage Meltdown in Australia

  1. c141nav says:

    It’s straight out of “The Big Short”

    • Far says:

      In “the big short”, few financial e pert knew that is coming. So the CDS were cheap worthing the risk. Now everybody knows and it is not cheap to short.

  2. Ptb says:

    I still remember when, in 2006, about 70% to 80% of all new mortgages in San Diego county were interest only ….what could go wrong??

    • Ptb says:

      Any word about a neg am loan being available? That was about the final step here in the USA

  3. Petunia says:

    Australia is a big country, why people allow the govt to restrict building, and push up prices makes no sense. This bubble was created by govt policy. There is more land in Australia than they could ever use with their population. The banks may be greasing the wheels of power but people need to use some common sense.

    • John Doyle says:

      Not too sure about what you say. Governments in general are happy to see house prices going up. In fact Australia during the years before the GFC had a 10 year run of budget surpluses. It was really a disaster, but the pollies etc said it was great. It was paid for out of a housing boom. and the main cities are, like Vancouver been in another boom right up to today. The government spent the largesse on tax cuts. Clever, no? NO.

      The land area is not relevant because we all live around the edge, max 90 minutes drive from the oceans. Sydney is a highly sought after destination so there are no empty houses to speak of and no hollowing out a la Detroit etc. But the houses are over $A1,000,000 median price and that cuts many out of the market.

    • Aussie says:

      Yes Australia has land but no jobs where the land is located!

  4. Bitter Aussie says:

    For foreigners to Australia watching this article, here’s some important information.

    The Australian government gives a HUGE tax break to property investors, being able to write off the interest, renovations, realtor fees, maintenance fees, upgrade fees, local state rates and what have you, ALL of it against their taxable income.

    This makes buying a property a “wise” investment for the rich, so they can offload their spare income there and reduce their tax. The idea is to sell the property 30 years later when it’s 4x the value. Hence the interest only loans.

    This ATROCIOUS tax policy has driven the prices to crazy levels and as a side effect has seriously harmed first time investors who simply want to purchase a home.

    FURTHER to this, we seem to have incredibly lax laws about foreign investment. Due to this being a “nice country” and the booming housing prices, many rich Chinese are offloading their cash, out of China before the government confiscates it or taxes it heavily (or whatever)
    Since “money talks” the Chinese investors seem to continually find ways to get their money, out of China, into Australia – so they too are competing for houses.

    Ultimately people who save money and just want to buy a home to live in are SCREWED by this and the speculator, tax offset people have been running away with money scott free, subsidized by the rest of us.

    It’s A NIGHTMARE. Buying property here sucks and I personally hope it crashes, ridiculously hard.

    • CrazyCooter says:

      “The Mongol-founded Yuan dynasty (Chinese: 元, 1271–1368) also attempted to use paper currency. Unlike the Song dynasty, they created a unified, national system that was not backed by silver or gold. The currency issued by the Yuan was the world’s first fiat currency, known as Chao. The Yuan government attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government. Inflation in 1260 caused the government to replace the existing paper currency with a new one in 1287, but inflation that resulted from undisciplined printing remained a problem for the Yuan court until the end of the Dynasty.”

      Yuan. Where have I heard that before. Oh, that is right! What a beautiful cherry on top!

      While I am partial to writing long opinions about the matters of the day, today I will settle with a Wiki citation and cartoon – it says all that needs to be said.

      (google: dilbert buggy)

      And, if I wasn’t clear – this is one of many, many, many examples of (1) human nature and (2) fiat currency.



      • Mark says:

        Reading your opinions is like taking short course on subject.
        Please continue to do so.
        Yes, the cause for all problems on earth are humans and this collective schizophrenia we live in (I hope you don’t mind me using one of my terms to explain root of the problem).

    • Les Francis says:

      If you watch the 60 minutes video and the part where the commentator and his interviewee are attending a house auction in Sydney, have a close look at the demographic of attendees and bidders at the auction.

      The government and land shills continuously call the percentage of foreign buyers or their proxies for upper market real estate as only being 2% despite a government instigated and funded report released only last December which put the percentage at around 18%.

    • Henk-2 says:

      I can back up everything you state because when Gough Whitlam became Prime Minister in 1972 he abolished this crazy system of writing off all expenses on properties ( negative gearing ), apart from the first home.

      I must admit in the context of full disclosure that I benefited from it because the price of houses fell dramatically and I bought my house for $A23,500 and now it is worth $A425,000. It was my only chance to ever get my own home.

      To me that is irrelevant as I can only live in it whatever the price.

      But I would be quite happy if all these houses went back to $A25,000.

      The young people of Australia deserve better, they should get a block of land with the birth certificate.

  5. Michael Francis says:

    Another issue that will soon make news headlines is the extremely poor building standards in Australia that these houses are built to.
    Many houses that are now 5 years and older are starting to fall apart. Highly leveraged owners can’t afford repairs and the builders who built them wind up their companies to evade legal action.

    Basically, the modern house is constructed of cheap, highly flammable foam panelling stapled to a ‘toothpick’ frame and rendered to resemble a solid brick wall.

    • Nicko says:

      echos Vancouver’s ‘leaky condos’….

    • Andrew says:

      This! Living in Melbourne there’s no way I’d be way of these new ‘dog box’ shoddily built apartments. $400k for one bedder, paying body corporate fees (often $100/week or more). Nightmare waiting to happen.

  6. ben says:

    Absolute rubbish – banks know and they don’t care. They’d rob you blind given the chance.

    • Les Francis says:

      Years ago when Australian banks had local managers and lifetime staff I remember a manager telling me that the banks were very reluctant to start up the premise of sub prime style loans, interest only and no deposit products.
      The government were encouraging these things in the name of growth.

  7. shaba says:

    We haven’t had a recession in over 25 years. Real Estate investment is almost a national obsession for the middle class and wealthy, especially since no ill effects occurred post Great Recession.

    You’ll never hear an economist or commentator with any regular media presence say anything other than ‘growth might slow’ at worst. There is never a bubble. The bulls are emboldened by the ‘resiliency’ of the Sydney / Melbourne market – nothing happened in 08 because our market is strong, with good fundamentals. No mention of the trillion yuan stimulus package or the inflow of hot Chinese money looking for safety outside of China.

    The current debate here is around negative gearing (deduct rental losses / depreciation from taxable income). It looks like it will be an election issue.

    The PM actually came out yesterday and said words to the effect of ‘if we take NG off the table our house prices will collapse, thats what the opposition wants’. Yet they are adamant there is no bubble. So…. take away the tax incentive and the market will crumble. And of course the property lobby has been running a scare campaign on NG and have attacked Johnathon Tepper despite his accuracy re: Spain, US – “it’s different here”.

    Crazy thing is so many articles / twitter talk after the 60 mins piece almost solely focusing on Ms Maloney’s poor decisions. The vitriol is saddening: greedy, got what you deserve etc etc. No focusing on either the household debt to gdp ratio, price to income or the fact that the mining bust affects mining towns first and then filters into the rest of the economy later, the longer it goes on.

  8. Jeff says:

    Same story across the ditch here in New Zealand! You would have to put a gun to my head in order for me to buy a home in the Auckland metro. Out in the bush it is a little more reasonable…. Just no jobs, and the traffic into the CBD SUCKS!!

  9. Cam says:

    I’m in NZ, live and work in Auckland. Housing is complete insanity in this city!

    We have 30+ suburbs with average house prices over $1m NZ (aprox. $650k USD) How is the average man supposed to afford to buy at these prices? It’s completely driven by property investors/speculators and the inflow of money from overseas. I earn an above average wage (~45k USD before taxes, take home maybe ~$32k USD after direct taxation) but the equation to home ownership just doesn’t stack up anymore. I’d have to move more than 100 kms away from work to find an affordable house for us.

    Here’s a few things I’ll add to the equation, because there are other elements that make ownership difficult. It will also add context as to what it’s like for the international audience.

    Nearly all NZ Banks are wholly owned subsidiarys of their Australian parent, these banks are ring fenced by NZ Reserve Bank legislation to set the framework with which they operate in NZ, but their profits flow across the ditch. Unlike in the US our Reserve Bank is owned by the Crown, and profits/losses from that entity flow to the Crown. One thing our reserve bank does well is maintain monetary policy independent of the government of the day. As global interest rates have fallen so has the OCR which now stands at 2.5%, and it’s likely to go lower in the near term it would seem (emerging global financial crisis). The Reserve bank is now using some interesting alternative monetary tools aside form the cash rate to cool the housing market because to lower the cash rate further will only add fuel to the house price fire.

    For lending in Auckland banks are only allowed to have so much loan to value ratio below 20%, so most lending interest rate is advertised to start with a 20% deposit, and 30% is required for property investors. this is mandated by the RB because it clearly sees the housing price risk, particularly in Auckland. Gone are the days of 5% deposits for first home buyers. Banks aren’t really keen on interest only lending unless you have probably 50%+ equity, interest only loans are mainly used in bridging loans if the sale & purchase settlement dates are not at the same time.

    You might ask why this was introduced, but here’s the big difference between Oceania (Aust + NZ) compared to North America (Canada + USA)

    When you take a mortgage (todays 20% deposit borrowers would get loans in the 4.5 – 5% range) there is no such thing as ‘hand the keys back and walk away’ that seems to be the norm for NA, here you are committing to the loan until you sell the property or repay the loan, you cannot ‘walk away’ unless you declare bankruptcy. What this means is that in a falling market the borrower loses all equity ahead of the bank, then if the loan is foreclosed on and the property sold for less than is owned then these losses are visited on the borrower as well (Bankruptcy is the only way out) The Reserve Bank can see this risk of borrowers being completely wiped out so it restricts access to the money by increasing the cushion for which prices might theoretically fall to, without the borrower ending upside down on the loan.

    Here’s the thing they don’t really tell you, that interest rate you get, really low now is only for probably a max of 2 or 3 years, it’s NOT for the life of the loan. NO bank offers a 20 year term, 5 years seems the maximum and those loans are more like 6 – 7%. Some of us are old enough to remember when the interest rate was 15% (capital has always been expensive in NZ because there is very high demand for it) It’s not that long ago when 7-9% was the norm – only 10 years ago. These buyers today are going to bleed so badly they do not know what’s coming when the global bubble bursts and prices fall here.

    This system only makes sense to borrow into if prices rise forever and ever!! We refuse to play to ponzi – realistically I know what we can commit to over a 20 – 25 year term for a house loan and it’s certainly not borrowing $750,000 @ 9% !!

    Where it all goes from here who knows but prices have peaked for now but there is still high demand for housing from immigration and a shortage of supply. I also bet there are HEAPS of aussies who are leveraged into this market as well, no doubt off the back of their family home – we have a closer economic relations agreement between our countries which treats aussie investors exactly the same as kiwis and for many years the price rise capital gain has been effectively tax free. Guess which properties they’re going to dump when their bank comes a calling about the state of their own home loan in Aus.

    The system is totally designed to enrich the already wealthy, so in that respect at least things are exactly the same no matter where in the world you are.

    The ordinary man has zero chance these days…

    • night-train says:

      Cam: Thanks for the input. Very interesting. Seems like everyone in the developed world is drinking from the same pail.

    • jeff says:

      Hello my fellow Aucklander. Sitting in bumper to bumper traffic this morning….good time to check in on Wolfstreet.

      I was not aware that the RB of NZ was under the shadow of the crown! Would it be accurate to say it is a satellite of the Bank of England? AUS. the same way?

      I am in NZ on a 3 year visa, Just a dumb yank from Colorado. Very interesting time this past year has been to say the least!

      • Cam says:

        Cool, I hope you really enjoy NZ, no doubt the way we do some things is quite different to what you would be used to – Universal pension for all (no means test), free health care and education, no fault accident compensation… vote for the flag change! Down with British…

        In my reference to the Crown it is the legal entity of NZ as separate from the government of the day, the Queen of England is our nominal head of state. (we are not a republic and there is less mood for republicanism here in comparison to Australia) The Governor General is the Queens representative in NZ. It’s a ceremonial position… he (or she) opens the parliament, attends war commemorations on behalf of the Queen etc but has no real power. We pay for the royal visits, that’s about the limit really in terms of cost. In reality ‘The Crown’ is all the citizens of our country.

        Will you apply for citizenship at some stage? I’m pretty sure your work visa provides you permanent residence. It’s pretty easy to get citizenship once you’re here but I’m not sure what the dual citizenship rules are from the US perspective. Funnily enough I’m a natural born Queenslander, but my parents are 5th Generation NZers. Immigrants make up a good proportion of the population now.

        • Lee says:

          For those in the USA the relationship between Australia and New Zealand may be quite interesting.

          For an Australian to travel to New Zealand no visa is required. No visa is required for permanent residents (PR) of Australia either.

          Upon entering New Zealand the Australian citizen/PR holder is given a Permanent Resident visa. You can stay there forever……….

          You can work and study there as well with no further requirements.

  10. interesting says:

    I read a lot about how the USA abuses the printing press by printing dollars and it’ll be “worthless as toilet paper” at some point.

    The Chinese are doing the exact same thing (even worse by some measures) but they are going around the world and buying it up with their own worthless toilet paper currency and not a peep from most of those same dollar bear commentators. I’ve even read that some even think the Yuan WILL be the next world reserve currency as if they will overnight “back it with gold” or some such bullshit…….at some point i think all these Chinese are going to need to get their money back.

    one thing for sure though is that when i talk about this with my fellow Americans it becomes perfectly clear, they don’t care.

  11. Keith says:

    The global monetary system was designed by bankers for bankers and they get a cut at every step in the process of money creation.

    They are given the privilege of creating money out of thin air (fractional reserve banking), which they can then lend out and charge interest on.

    There is only one task they have to carry out and that is to lend the money prudently to people that can pay them back plus the interest.

    Could it be any easier, with no manufacturing, supply and distribution chains to worry about?

    What are bankers like at prudent lending?

    “What is wrong with lending more money into the Chinese stock market?” Chinese banker recently

    “What is wrong with lending more money into real estate?” Chinese banker last year

    “What is wrong with lending more money to Greece?” European banker pre-2010

    “What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008

    “What is wrong with lending more money into real estate?” US banker pre-2008

    “What is wrong with lending more money into real estate?” Irish banker pre-2008

    “What is wrong with lending more money into real estate?” Spanish banker pre-2008

    “What is wrong with lending more money into real estate?” Japanese banker pre-1989

    “What is wrong with lending more money into real estate?” UK banker pre-1989

    “What is wrong with lending more money into the US stock market?” US banker pre-1929

    Globally incompetent at the only job they have to do.

  12. Lee says:

    Yeah, it was about time for the next round of the “The Australian Bubble”.

    That person bought houses in a MINING town out in the middle of nowhere with a population of under 9000.

    “Moranbah was established in 1969.[7] The town was rapidly expanded in the late 1970s by the Utah Development Company to house mine workers. The town has been featured twice (once in 1977 and again in 2012) on Four Corners, an investigative news program, exploring the effects of Australia’s various mining booms on local rural communities.[8]

    Moranbah Post Office opened on 1 March 1971.”

    What do expect to happen to house prices when the main industry in the local area crashes? Go up?

    And as far the statement:

    “In Australia, which has the highest household debt in the world, “homes are so expensive that nearly half of all mortgages are interest-only.”

    I do really, really doubt that banks have written that many loans that are interest only. The APRA would have been screaming about that a long, long time ago. Maybe you can put up some sources for that………………

    And local area real estate is doing very well, thank you. Houses in the area are selling with prices for sold properties higher than the original asking prices.

    The million dollar house finally sold for A$10,000 over asking and the el cheapo went for A$30,000 over at A$610,000.

    Melbourne auction clearance rates were in the mid 70% area last weekend.

    So again, I guess we’ll have to put off the crash in Melbourne for another week.

    • Wolf Richter says:

      You’re missing the point: as the article said, BANKS that knew all this lent to them anyway under these crazy terms and insane prices!

      Banks are making ludicrous loans, as this town shows, to inflate the bubble and keep it going all over the country. These are the same big banks! At some point, luck runs out. As I said, it’s all about the banks. It was all about the banks in the US housing bust too! Deny it at your own risk.

      • TomCat777 says:

        Wolf, I’m still annoyed by this but I understand what you are trying to point to with the banking problem. Banks, as we all know currently, have no standards and have no reason to stop being ludicrous due to their “luck.”
        Let’s get to the heart of this, they borrowers are simply stupid about finances in the end. Too many people think they are getting a good deal when a bank is handing out money “free of charge,” if they just signed on the dotted line without reading the fine print where it says… ” I will pose your soul if you fail to pay up.”
        In reaction, the borrowers act shocked… shocked that the fine print carried such a heavy price, prior to amount of time the borrower had to study the contract and due their homework on their “buying opportunity . ” Is it really any wonder why bubbles exist these days?
        If we could get smarter borrowers, less borrowing might happen because people might just decide they don’t really need or want that “great opportunity.” Which in turn will calm the banks down because a standard would be imposed. The banks need people to borrow the money in the end but they can’t force people to borrow, only help make it “easy” for them. That’s why it annoys me so much that both sides are bad actors. Borrowers are financially ignorant and the Lenders are financially desperate making Russian Roulette seem like child’s game when compared to this unknown “known” odds..
        Excuse me if I ramble off some… I’m just really annoyed with it all.

        • Wolf Richter says:

          Forget the borrowers. It’s about the banks. Are you ready to bail out the Aussi banks? Their balance sheets are chockablock with these “insane” mortgages. And they will curdle, as they have done in every other country after the housing bubble imploded.

          There are a number of articles on Aussi banks on WOLF STREET. Check them out.

      • Lee says:

        In regards to the statement in the article:

        “In Australia, which has the highest household debt in the world, “homes are so expensive that nearly half of all mortgages are interest-only.”

        is not correct.

        In the APRA link provided by the other poster indicates that nearly half of NEW HOUSING LOAN approvals are interest only.

        Half of all housing loans in Australia are not interest only. A far difference from the scare mongering in the original topic.

        Anyway, keep up the good work and let’s see what the housing market does in one year, three years, and five years from now.

    • Doc Ando says:

      Go buy some properties Lee, I dares ya!

      • Richard Hill says:

        OK, so what is the best way to survive the oncoming crash?
        Sell bank stocks?
        Buy gold?
        Any advice would be appreciated.

        • Henk-2 says:


          to give financial advice in Australia you must be licensed to do so.

          Having said that, gold does well in both inflation or deflation.

        • hidflect says:

          Buy gold mining stocks. Contra stocks I call them. Positive cash flow and no debt. Made over 40% gains over the last few months of this bear market. Check it yourself AX:EVN, ASX:RSM, ASX:RSG

      • Lee says:

        I already have one, don’t need another and couldn’t afford to buy one more anyway.

        My little area of Melbourne is a great spot with everything people need close by. Little crime, lots of green, shopping and good schools. Houses are in demand – townhouses even more so.

        Properties come on the market and get snapped up quickly for more than the listing price.

        Based on the prices here we don’t have a bubble. Housing is quite affordable for people making average earnings and if both husband and wife work they can buy a better quality place or pay off the house faster.

        Prices range from 5 times average earnings to multi-million dollar mansions. Take your pick. You can even buy a ‘dump’ for 4 times earnings – a far cry more the scaremongering 11 or 12 times often talked about in the press.

        Just like in Japan during the bubble, to most people the ‘bubble’ had no meaning.

        Out here we could care less if that place in Kew or Glen Waverley went for $6.5 million or $3.5 million or if that house in that outback mining town has gone by 50%.

  13. Richard Hill says:

    There are ghost towns near old mines all over Australia. There is no need any more. With FIFO (Fly In Fly Out) people can live where they want and work where the jobs are. But the government and unions are negative about FIFO.

  14. roddy6667 says:

    Throw another bank on the barbie, mate.

  15. nick kelly says:

    The other fact: the Aus boom is a reflection of the insane China boom- a credit bubble that makes the US Fed seem like the Scottish Widows Society.
    There is also the fact that- back out China- Australia is in the middle of nowhere.

    • nick kelly says:

      Ps: no other comparable country’s stock market is so dominated by its banks. The Aus stock market IS its banks ( ok about 50%) and its banks ARE their mortgage business.
      The comparison to pre-crash Ireland is inescapable.
      But what does Aus have that Ireland didn’t?

      Iron ore.

  16. HARRY HV says:

    Iron ore, well no that’s not in big demand any more. Australia, which no longer has any industry to speak of, is now reduced to selling its homes and farms and mines to foreigners.

    House prices are set at the margin by Chinese buyers so the ratio of home prices to Australian incomes is irrelevant. Over here the property industry owns the government (whichever party) and forces them to increase migration whenever property shows a sign of slowing.

    Without the Chinese and other Asian migrants Australian property prices would be normal, 5x average annual earnings for a 4 bed house rather than 20x. How to prove this? Easy, check out Australia’s 5th largest city – Gold Coast, it’s one place the Chinese haven’t arrived yet so prices are normal.

    So, what will happen next? You’ve guessed it – the property industry will instruct the Australian government to issue more incentives for Chinese migrants to come to Australia and buy what’s left of our homes, farms and mines.

    • Thestarl says:

      Housing now outstrips mining profits how utterly depressing.
      We have no manufacturing ,the once in a lifetime mining boom is in the rear view mirror,China buying up all our premium aggricultural assets I’d say this ends very badly for Oz.

      • keith says:

        In a globalised world no one seems able to learn from the mistakes of others and everyone has to have their own housing boom.

        Not even that is enough, as soon as one boom and bust cycle has past, the next one starts.

        I got into the UK housing market back in 1988, before the bust started in 1989.

        After reaching lows in 1994, the next boom took off in 1996.

        We just don’t seem able to learn from mistakes.

        Though I did fare better in the next boom and made my next move early in the cycle.

        • Thestarl says:

          My understanding Keith is that the global financial system is now in unchartered waters with NIRP,massive QE from CB’s,stagnant trade(BDI @ record lows)money velocity low and crude prices in the doldrums.
          I mean take the Australian housing market how many loans now are interest only,private debt @ 2 trillion USD our main export income halved.What about those CSG to LNG plants built in Qld wonder how they’re going trying to service those massive debt piles with low LNG prices.
          The consumer tapped out with debt and stagnant wages.So how do you solve a debt problem with ever more debt?

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