Large falls in mortgage applications is surfacing among mortgage brokers suggesting not all is well in the housing market.

The Loan Market Group has indicated home loan approvals have fallen 40 per cent from its peak in 2009. LMG has recorded its slowest month since January 2006.

But falls of this magnitude isn’t isolated to the Loan Market Group. Last week, AFG, Australia’s largest mortgage broker with 10 percent of the market announced it had sold $1.5 billion worth of loans in January, down from $2.9 billion in September 2009. The 47% fall comes after four consecutive monthly falls. AFG said it was the worst January since 2005.

» Demand for home loans ‘dives in January’ - Yahoo 7, Friday 5th February 2010.
» Mortgage market under pressure as rising rates spook buyers - Sydney Morning Herald, 1st February 2010.
» 47% Slump in Mortgage Sales : AFG warns RBA on another rate rise - AFG, 31st January 2010.

Data from the Australian Bureau of Statistics (ABS) show the prices for houses in Australia has surged in the December quarter. The weighted average for the eight capital cities increased 5.2% for the quarter, bringing the annual gain to 13.6%, once again outstripping wage growth and inflation.

» 6416.0 - House Price Indexes: Eight Capital Cities, Dec 2009 - The Australian Bureau of Statistics, 2nd February 2010.

Only a month after the end of the government’s First Home Owners Boost, and cracks are appearing with both borrowers and lenders caught up in the frenzy.

The Sunday Telegraph today reports that almost half of the 135,000 first home buyers coax into the First Home Buyers Boost are struggling to meet their mortgage repayments with many in arrears. In a survey of 26,000 of the borrowers, Fujitsu Consulting found that 45% were either in mortgage stress or severe mortgage stress.

The problem of mortgage stress effects more than just First Home Buyers. The Mortgage Finance Association of Australia/Bankwest Survey of 850 people across Australia indicates approximately 16 per cent of owners struggled to replay home loans in November, up from 11.7 per cent in May.

But it is not only home owners which are struggling. Both the Westpac and Commonwealth Banks took on First Home Buyers last year like a cat in a mouse plague and are now licking their wounds.

The Australian Prudential Regulation Authority (APRA) requires that banks to take out lenders’ mortgage insurance (LMI) on loans with a Loan Value Ratio (LVR) over 80% and this insurance is passed onto the buyer. The majority of First Home Buyers had little in the way of deposits, outside of the grant and the boost.

As Westpac has two mortgage insurance subsidiaries, Westpac LMI Limited and St George Insurance Australia Limited, APRU requires the bank to put aside the premiums, it can’t adsorb it into its normal operations. BusinessDaily believes Westpac has had to increase the paid up capital of its mortgage insurance subsidiaries by more than $330 million.

As a result, the Westpac Bank has lowered its loan to value ratios on standard variable mortgages from 92 to 87%, requiring borrowers to either have much more substantial deposits, or borrow less with the deposit they have. Low doc loans have also been reduced to 80%. If the rest of the Australian mortgage market follows suit, this could easily spell the end for Australia’s overinflated housing bubble.

» Aussie’s struggle to foot mortgage bill - The Sunday Telegraph, 31st January 2010.

» More Australians Struggle With Mortgage Payments, MFAA Says - Bloomberg, 29th January 2010.

» Insurance blowout weighs on Westpac - Herald Sun, January 27th 2010.

Sales of existing homes in the United States fell 16.7 per cent in the month of December, the biggest monthly drop in 40 years.

American First Home Buyers were eligible for a Tax Credit of up to $8,000 which was due to expire on the 30th November 2009, however Congress decided to extend the grant to April 30th and bolstered it to include a $6,500 credit for existing buyers.

Despite the extra interference from Congress, the rush to qualify for credit ultimately resulted in the crash wiping off the 4.9% gains made in the year.

The Australian Government has made no indication yet that it will extend the First Home Owners Boost, which expired on the 31st December.

» Existing home sales plummet 16.7% in December - Market Watch, 25th January 2010.

The rental crisis has ended with property developers flooding the market with apartments they have been unable to sell and renters finding cheaper accommodation with the knowledge times are hard and they are worried about their jobs. The number of vacant properties in Melbourne, Sydney and Brisbane has returned close to long term averages.

SQM Research managing director Louis Christopher says it debatable if capital cities are seeing rental shortages. “I think it’s very debatable whether there is a shortage… and especially in Melbourne whether there is one or not. We have to be careful about how this is discussed, because the topic is certainly up for debate.”

It’s believed the free flow of capital in the last decade has contributed to rising prices and not a shortage of homes. This is contrary to Real Estate and Housing Industry lobby groups who have been flogging housing shortages like there is no tomorrow. The free flow of capital is likely to dry up quickly with the lead from Westpac this week in reducing LVRs.

In Melbourne vacancy rates increased from 3.1% to 3.5%, Brisbane saw an increased from 2.9% to 3.4% and in Canberra the figure increased from 0.7% to 0.9%.

Data shows a trend of renters moving to cheaper accommodation in the outer suburbs. “If you know times are hard and you’re worried about your job, chances are you will opt for cheaper rent. People are opting for a $600-a-week rent now, rather than, say, $1000 a week — it’s as simple as that.”

This will put a spanner in the works for landlords who have been pumping up rents in an economy where wage rises have been close to non-existent and the reduction in the hours worked has been common. These people, faced with rising rents have no choice but to vacate and move to cheaper accommodation.

Louis Christopher also reports the national vacancy rates have been driven by developers who have had to release apartments onto the rental market as they have been unable to sell them.

In Sydney, areas like Rhodes who have a huge number of apartments being built has a rental vacancy rate of 10.9%. Along the Pacific Highway and the rail corridor, Gordon is trailing a little behind at 8.3% and Turramurra is 7.6%

Mr Christopher also indicates that to a lesser extent, many home owners also unable to sell their properties have been forced to rent them out, adding to stock levels.

» Rise in rental vacancies raises questions about housing shortage and soaring prices - Smart Company, 24th January 2010.
» Budget renters ease inner-city squeeze - The Australian, 23rd January 2010.

In what has been a shock to brokers, Westpac has written to mortgage brokers informing them RAMS branded products will no longer be distributed to third parties, and only marketed to its 92 franchised stores. The Herald Sun writes “WESTPAC’S funding problems have forced it to shut down a key part of the RAMS Home Loans business. ”

This follows the lowering on the loan value ratios (LVR) on Westpac’s own branded standard variable mortgages on Monday from 92 to 87 per cent. It has also lowered the LVR on more risker low documentation loans to 80 per cent.

The lowering of the LVR will mean home buyers are required to contribute a larger deposit before they can get a loan.

» Westpac cuts brokers from RAMS loans - The Herald Sun, 19th January 2010.

» Westpac turns off tap - The Herald Sun, 20th January 2010.

The Commonwealth Bank of Australia’s Wealth Management Provider, Colonial First State has been forced to freeze withdrawals from a $850 million mortgage income fund after an increase in bad debts. Colonial has $2.6 billion in funds invested in mortgages.

» Colonial Freezes A$850 Million Mortgage Fund, Herald Says - Bloomberg, 14th January 2010.

Today’s ABS figures show a shock plunge in the number of loans taken out by owner-occupiers in November. Loans to owner-occupiers fell 5.6%. While the average economist only forecasted a drop of 2.3%, it should have been expected the winding back of the First Home Buyers Boost would have had some effect.

Loans for the construction of new dwellings fell 6.5%, while loans for the purchase of newly-built dwellings fell 5.1%

Meanwhile, data from the Australian Finance Group paints an even bleaker picture for December. According to AFG, there was a 21.2% fall in the number of applications for new mortgages in December, the last month of the scaled down First Home Owners Boost.

» Shock plunge in home loan approvals - Yahoo 7, 12th January 2010.

» Housing sector hit by rate rises, end of grant - The Australian, 6th January 2010.

Yesterday the Australian Prudential Regulation Authority (APRA) released a discussion paper detailing the proposed Financial Claims Scheme (FCS).

The paper details procedures ensuring when an Australian Deposit taking Institution (ADI) goes insolvent, there is adequate information to enable depositors to be paid promptly. This includes how end of day balances are calculated, potential payout options, the aggregation of accounts to ensure that each account-holder is able to be identified.

Last year in the U.S., the FDIC (Federal Deposit Insurance Corporation) closed 140 banks who where deemed insolvent.

» APRA consults on implementation of Financial Claims Scheme - APRA Media Release, Wednesday, 6th January 2010.

Figures from the Reserve Bank of Australia today show annual credit growth has slowed to a 17 year low in November. Credit growth for the 12 months to November 2009 was just 0.8%.

Business credit contributed the most to the fall, falling 8.2% in the past year. While many business have sought other means of raising funds such as going to shareholders cap in hand, this reversal in growth may impact jobs in 2010.

Westpac Economics reported “The weak demand for business credit has taken annual growth in business credit to minus 8.2 per cent, which is the lowest annual growth in business credit in modern history, exceeding the early 1990s downturn.”

Housing credit has grown sightly from lows in April and May, fueled by emergency low interest rates and the First Home Owners boost.

Falls in demand for personal credit is starting to slow, possibly due to increased consumer confidence.

» Financial Aggregates - November 2009 - RBA, 31st December 2009.
» Credit demand slows to 17-year low: economists - The Sydney Morning Herald, 31st December 2009

Australians are trying to starve off recession by spending, something which can only end in disaster as the debt continues to pile up.

Figures from the Reserve Bank of Australia show Australians now have more household debt than the countries’ GDP. Personal Debt is now 100.4 per cent of Australia’s Annual GDP or $1.2 trillion dollars, surging 71% in the past five years and surpassing that of America.

Mortgages contribute almost 90% to personal debt, up by five percent this year fueled by the Federal Government’s First Home Boost.

With Interest rates due to rise in the next year, this level of extremely high debt will ensure pain is felt. News Limited reports “There are also concerns rising rates will create a belated “credit crunch” as banks pull back on lending to heavily indebted customers. When that happened in the US and the UK, house prices plummeted.”

“Our debt is our Achilles heel, there’s no question about that,” Shane Oliver, chief economist at AMP Capital, said.

The financial accounts from the RBA show just how irrational and risky current markets are. It shows household net financial assets excluding real estate shot up 17% in the September quarter alone, making the sharpest rise in wealth since the start of records 21 years ago. This is $8200 per person in three months. While this may sound good, it is only half of what was lost during the global financial crisis.

This extreme volatility has caused households to take cover. 2 years ago households had $370 billion in bank deposits and $431 billion on the share market. In September bank deposits grew to $507 billion, while stock market investments fell to $327.

» Debt level enters danger zone - The Courier Mail, 27th December 2009.
» Aussies $1.2 trillion in debt - Yahoo 7 Finance, 27th December 2009
» Household debt tops national income for first time - The Sunday Telegraph, 27th December 2009.
» Australians rack up record debt - Yahoo 7 Finance, 27th December 2009.

The U.S. government has removed the US $400 billion dollar cap and extended support to 2012 for Fannie Mae and Freddie Mac in preparation for the second wave. Fannie Mae and Freddie Mac together guarantee almost half of all mortgages in the USA.

The timing of the announcement, done during a no news period while everyone is celebrating Christmas and the unlimited nature has raised questions.

A journalist for the Canadian Press wrote “The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.”

The U.S. government has so far provided Fannie Mae with $60 billion of tax payers money and Freddie Mac with $51 billion. This is only $111 billion from the $400 billion cap originally pledged in September 2008 and due to expire on the 31st December.

“The companies are nowhere close to using the $400 billion they had before, so why do this now?” said Bert Ely, a banking consultant in Alexandria, Va. “It’s possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets.”

» US extends guarantees on Fannie, Freddie - AFP Business, 25th December 2009.
» Fannie Mae and Freddie Mac receive unlimited future funds to stay afloat - The Canadian Press, 25th December 2009.

A Bankwest/Mortgage and Finance Association of Australia (MFAA) research report found that 43.8 per cent of potential first home buyers are saving money in case the economy deteriorates. 47.9 per cent are now looking at purchasing cheaper properties that originally planned.

The new report comes as welcome relief after a year where first home buyers were encouraged into taking out loans they couldn’t afford by the Federal Government dangling the First Home Vendors Boost carrot in front of them. The boost was watered down at the end of September and will be removed at the end of the month. 28% of first home buyers said the grant simply over-inflates house prices.

» First Home Buyers Shun McMansions - MFAA, 23rd December 2009.
» McMansions out of favour after grant slashed - News Limited, 23rd December 2009.
» McMansions out of favour after grant slashed - Sydney Morning Herald, 23rd December 2009.

The Herald Sun today has reported large discrepancies between the average house price released by the Real Estate Institute of Victoria (REVI) and official data from the Valuer General. In some cases, the REIV prices are inflated by up to 18%. In comparing the two figures for every quarter, it appears these large discrepancies have been occurring in every quarter since the start of 2007, a period when the housing market started to loose steam.

For the quarter of September 2009, the average house price for Victoria as released by the REIV was $480,000. Yet the official valuer-general’s numbers are more like $413,000, some $67,000 lower.

Experts indicate the difference in the figures is possibly due to agents failing to report their less impressive sales, skewing results.

This had been a big problem in the Melbourne market for a while, especially with auction clearance rates. For example, on the weekend of the 17th October 2009, there were 683 properties listed for auction, yet the results of 440 were never provided to the Australian Property Monitors. The auction clearance rate for that weekend (75.3%) was calculated on the number of reported auctions (239 [4 were withdrawn]), but with RE agents having a choice on which properties to report, it is highly likely they would report successful auctions over ones passed in, invalidating any auction clearance rates in Victoria.

It’s quite possible property in Melbourne is coming off the boil, but with statistics like these, no one will know.

» Victorian home prices overstated - The Sun Herald, 20th December 2009

Over night, the Federal Deposit Insurance Corporation (FDIC) shut down a further 7 United State banks bringing the total this year to 140. This number of failures is the most since 1992 during the grips of the savings and loans crisis.

Most of the banks have become a victim of the real estate crash with many mortgagees defaulting on loans they couldn’t afford and as the value of properties plummet, it makes it difficult for banks to recover the full value of the assets.

During the year, buyers have been found for many of the banks allowing them to reopen days later under the new owner. In some cases, like today, no buyer could be found for RockBridge Commercial Bank so depositors will receive cheques for the insured amounts. Depositors with accounts exceeding the $250,000 per account insured limit will become creditors of the bank and will likely get some return in the dollar once the bank has been wound up.

The FDIC is an independent agency of the U.S. Federal Government set up in 1933 after many banks collapsed during the great depression in the 1920’s and early 1930’s. The bank failures this year has cost the FDIC $30 billion dollars, plunging it into the red. It expects bank failures to grow to $100 billion over the next four years suggesting the worst of the crisis is far from over.

On top of this, $500 billion in commercial real estate loans are expected to come due over the next few years.

» Seven U.S. banks closed by regulators; failures at 140 - Market Watch, 19th December 2009

In an Adelaide Advertiser article yesterday, Assured Homes Loans sales and marketing director Fred Rasheed was quoted saying “first-home buyers would experience “catastrophe” in the next 18 months.”

“A lot of people have got into the market and not even considered what will happen when rates go up 1 or 2 per cent,” he said.

“We’re about to say `sorry, you have to pay an extra $100 per week’. I think we’re on a path to disaster - you have new people in the market and these people don’t know what it’s like, all they know is 5.5 per cent interest rates and all they’re used to is rent going up $10.”

Young couples are “taking on loans they can’t afford” said Julian Disney, University of NSW’s Social Justice Project Director. “The economy and community are increasingly held hostage by inflated house prices, Until we stop, we’re heading for disaster.”

» First home buyers heading towards mortgage ‘disaster’ - The Adelaide Advertiser, December 18th 2009.

With many Australian’s relying on wage growth to fund housing expenses growing at an even faster pace, the future is not looking rosy for many businesses.

The Australian Corporate Health Index today shows more than 70 per cent of 200 listed companies outside of the financial services sector went backwards this year and 32 per cent was classified as unhealthy.

This follows a report two weeks ago about small businesses with a insider to the ATO saying small business debt levels are now “horrendous”. “We’re talking companies that can’t meet their liabilities,” he said. “A lot [of them] are trading which are technically insolvent.”

The report says Small Business makes up 40 per cent of private industry economic output and employs in excess of 5 million people.

Dun & Bradstreet’s CEO, Christine Christian said “‘The SME sector is unfortunately experiencing far more financial and credit stress than its big business counterparts, who are very much enjoying the benefits of the Government’s stimulus package”

» A third of companies unhealthy - The ABC, 14th December 2009
» Small business, big trouble - The Sydney Morning Herald, 5th December 2009.

The Sydney Morning Herald reports a forecoming $14 billion decline in mortgages written over the next 12 months as the first home buyer frenzy gets watered down.

The value of mortgages written fell $3 billion or 6 per cent in the September quarter as the full value of the boost came to an end. Much of the growth in the value of mortgages was attributable to the first home buyer’s BOOST.

» End of boost to hit mortgage market - The Sydney Morning Herald, 14th December 2009.
» Australian housing market heading into hole - The Courier Mail, 14th December 2009.

In what could be seen as a splitting image of Australia, young Chinese is struggling to get into a housing market fueled by speculation.

The AFP reports “The boom has been bolstered by easy bank loans, tax breaks and a lower down payment threshold, introduced by the government in the past year to support the real estate sector, a key driver of China’s economic recovery.”

But there are now fears much of the China Government’s 586 billion dollar stimulus package has been spent in asset markets such as housing, only leading to a speculative bubble.

Just like in Australia with the government removing the First Home buyers boost, “Fears that policymakers might withdraw these measures next year to dampen speculation have also triggered a round of what analysts call “panic buying”, further fuelling the price surge and increasing stress for younger Chinese.”

The Chinese Government has reported it plans to squash speculative home purchases. From next year, “individuals selling their homes will only be exempt from paying a 5.5-percent tax after at least five years of ownership, instead of the current two.”

The AFP articles comes a month after a report on Al Jazeera about an empty city call Ordos. The city was built by the government in 5 years and will house 1 million people, the only problem is it’s empty - No one lives there.

It is believed the motivation behind building the city was to support GDP. Most of the homes have been sold to investors, but few have been rented out. The Chinese have never seen a property crash, hence housing is seen as a safe investment, a place to park their cash even though there is no rental income or return. The real Ordos is an old city 30km away. Most residents here plan to move to the new Ordos one day, but at present prices are too high to sustain an economy there.

There are also reports of large commercial office towers which sit empty in other parts of China. Many of the towers which would have little change from a Billion dollars, earns no rent.

Australia is hoping China’s continued GDP growth will support it in years to come.

» Young Chinese groan at skyrocketing property costs - AFP, 13th December 2009.

While much of the world is coming to terms with falling housing prices brought on by crippling debt and the inability to service it, Australia’s size of new mortgages has hit a new record.

Fueled by emergency low interest rates, the average home loan brokered in November was $367,000 up 6.4 percent since May.

Victoria led the way with a 12.1 percent increase since May. NSW wasn’t far behind at 10.7%.

These figures give more ammunition to the RBA to hike rates to a more normal footing. Yesterday, the RBA put rates up 25 basis points to 3.75%, the first time rates have risen in three consecutive months.

» Size of new mortgages sets a record - Yahoo!7 Finance, 2nd December 2009.