Yes, the Australian property market is
falling, and this can only get worse because the basis of the
market has been turned on its head, and that which made it
such a wonderful punt in the past, is now turning into a game
of musical chairs, and more and more people are finding they
have nowhere left to sit, and they are going bust. As the
people go bust so do the mortgage companies. As the mortgage
companies go bust so do the banks and the whole underlying
fabric of society.
How did things get this way?
I guess the answer is the usual one: greed. Rather than
submitting truthful mortgage applications for their clients,
some mortgage brokers and lenders have been fudging the
Here are a few examples:
A lowly-paid deckhand described as a ship’s captain earning
$150,000 a year.
A 70-year old retired printer described on his loan paperwork
as a “self-employed painter” – job he last held in the 1950s.
His listed “employer” never even existed. His “salary” was
listed as $49,000 a year.
A 98-year-old woman persuaded to sign a document for a 30-year
loan... prompting one Australian Senator to quip: “She must
have a good doctor.”
The banks' audit departments should have picked up on these,
but (I kid you not) banks specifically hired people who
couldn’t speak English to verify whether a person was employed
and earning the salary submitted on the loan application.
When, as part of the Royal Commission's investigation, senior
counsel Rowena Orr asked an ANZ representative about this, he
replied: “Our processes are we do nothing." So, even in the
face of contrary evidence from their own information, banks
approve loans that are masquerading as affordable when they
quite clearly are not.
All this may seem absurd, but initially there was no problem
with any of this. Let me explain.
If the local property market is rising, then you get a
situation where someone applies for a mortgage. They can't
afford it, but what is the risk? Property prices are rising at
10%+ p.a., so who cares? Fred and Emily apply for a mortgage
of $100,000 to buy a house that is valued at $110,000. They
get a low interest rate introductory loan. They buy the house
and start paying the mortgage. After two years their interest
rate goes up to the normal amount. Fred and Emily can't afford
the new rate so they put their house up for sale. The
price has been rising at 10% a year, so the place can now be
sold for at least $130,000. After expenses the bank is covered
and Fred and Emily maybe even make a few thousand on the sale.
Everybody's happy. If the mortgage struggles on for another
year the price of the house has probably risen to $145,000.
Now everybody is making some very nice money out of what was
originally an exceedingly dodgy deal.
This scenario works as long as house prices keep rising, and
they need to rise enough to cover the cost of the deposit and
the missed mortgage payments. If house price rises drop to
only 5% a year, there is not enough increase in the value of
the house to keep the party swinging. If prices are stable,
the maths no longer stack up, and everybody is in trouble. Now
prices have started falling. This means everyone loses on the
deal, the buyers, the banks, and ultimately the whole economy.
An estimated 200,000 home loans will be moved from low
repayments to higher repayments as their interest-only loans
expire. The median increase in payments is around $7000 a
year, according to the RBA. Hundreds of thousands of Aussie
households face this huge rise in the cost of their mortgages.
What's the betting they will have to sell, thus crashing the
Let's add another plank to this ghastly edifice; The Khoshaba
principle. In 2006, Albert and Rose Khoshaba decided to
challenge the validity of their mortgage loan in court. Their
claim was based on what seemed like nothing more than
bureaucratic technicalities on an unimportant piece of
internal bank paperwork. Unfortunately for the bank, and
probably for the whole banking system, the faulty paperwork
that went with the mortgage offer was enough to chop $60,000
off the loan.
Since then a man named Manfred Schmidt reduced his $450,000
loan to $0. The Di Benedettos reduced their $500,000 mortgage
to $0. Jill and John O’Donnel, according to the Australian
newspaper, “cut their [$500,000] mortgage by 75 per cent.”
Wait a minute. Let's go back to the top of this article.
Mortgage application after mortgage application has been fixed
with faulty information. All those mortgages are probably
unenforceable. In short, the bank probably can't force the
inhabitants to pay the premiums on their loans. This means
there’s a chance Australia’s borrowers will launch a class
action. They’re going to try and cancel their loans en masse.
That is going to bankrupt the Australian banking system.
With house prices falling, who is going to buy? Auction houses
are finding they are selling perhaps 40% of the properties
submitted for sale. In short, as prices go down, people will
either not buy, or will attempt to push down purchase prices
even more. The more the prices go down the less houses will
get sold until people see some kind of bottom has been
reached. Meanwhile the unpaid loans stack up and banks start
to go bust.
Let us just take one example, The Commonwealth Bank of
CBA is already facing fines of about a trillion dollars for
nearly 54,000 breaches of Australia's money- laundering laws
dating back to 2012. A trillion dollars, which is a thousand
billion is about seven times Commonwealth Bank's market value.
Now factor in several hundred thousand claims in a class
action on the basis of the Khashaba ruling, and the bank is
holding an insane amount of debt which is unenforceable. Now
add in the serious drop in the value of the rest of the
collateral due to the continued slide of house prices. Now
multiply that across the whole banking sector and you have a
Oh yes, and now factor in foreign investment involvement, and
you have the makings of another world-wide financial collapse.
You don't need me to tell you to steer well clear of this,
though there are plenty of reckless people out there.
Okay, you can steer well clear by not buying real estate in
Australia, but what about the collateral damage to the
international banking system? I'm sure everybody remembers
what happened when the US mortgage system imploded.
Looking Forward to 2019 -- Part Two