The stage is set

For as long as I care to remember, the Real Estate salesmans’s call to action has been, “It’s never a better time to buy”.

But for the 27 percent of the first home buyer cohort who followed this advice the year before last, their homes are worth less than they paid for them, potentially leading to a situation known as negative equity.

According to RP Data, negative equity is on the rise around the country as we settle into our second year of house price falls. In the December 2011 quarter, 6.4 percent of homes were worth less than the purchase price, up from 4.9 percent in the preceding quarter.

Last month, RBA Head of Financial Stability, Luci Ellis briefed the Australian Mortgage Conference on prudent mortgage lending standards. Highlighting why some households default on their mortgages, she told the conference unemployment, especially during a recession was one cause. “So the really large upswings in mortgage arrears rates have, perhaps not surprisingly, tended to occur at the same time as large increases in unemployment.”

Additionally, falling home prices was cited as another factor for rising arrears, something she believes we need to be “alert” of. “If something bad happens to you and you can no longer afford your repayments, it is better to sell and have a bit left over after discharging the mortgage. If the property value has fallen below the loan balance, though, you are in a much worse situation. You can’t easily sell if you are in trouble or even if you just want to move to a cheaper area or a more appropriate home, or to where the jobs are.”

In conclusion, Ellis stresses Australia does not have the “ingredients” ripe for a US style housing crash, but warned mortgage lenders needed to remain prudent. ” It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation.”

Earlier this year we wrote on NSW repossessions rising 22.5% in 2011, including a link to a story on channel 7’s current affairs program Today Tonight called mansion repossessions..

On Friday night, it was Channel 9’s A Current Affairs turn with a story titled “Home Buy Bargain.” According to the story, repossessions are rising sharply around Australia in recent years. The story features Paul Flynn, who specialises in mortgagee properties saying he’s never seen anything like it. Read the transcript or watch the video here.

With house prices continuing to fall, mortgage repossessions on the rise and RBA Head of Financial Stability, Luci Ellis stressing mortgage lenders need to be prudent, just the opposite is happening. In a News Limited article, published last week titled “HOME OR BUST: Default fears as Australian banks return to high-risk loans”, it reports on RateCity data suggesting almost 70 percent of mortgage lenders are now writing home loans with deposits as small as 5 percent. This compares to 50 percent, two years ago. With little to no growth in mortgage lending, banks are resorting to higher LVR to try to encourage growth. But this comes at a very risky time in our economy.

Just yesterday, The Australian published an article, “Australian housing market just a jobs crisis away from collapse.” It paints the picture of weak housing market with sales turnover at 16 year lows, listings up 23 percent over the past year and construction of new homes down 25 percent since the stimulus ending in June 2010. But, as the article states, the best leading indicator is mortgage approvals. Most people require a loan to purchase a property. Mortgage approvals have plunged 25 percent since the first home buyers boost ceased.

According to the article, despite a very weak market, falls have been somewhat benign as arrears remain low. The Australian writes “People losing their jobs or running into trouble with their own small business is the main cause of people falling behind on their mortgage. Forced loss of employment has been very low until now.”

“Rising unemployment could unleash a wave of distressed sales in the housing market. With the fundamentals of housing supply and demand already so weak, the price movement could be much larger than the present downward drift, with which the Reserve Bank appears comfortable.”

Last month we reported on Roy Morgan’s private unemployment gauge – ABS unemployment figures ‘defy belief as job losses mount’- Roy Morgan. Historically, both the ABS and Roy Morgan indexes have tracked each other, but in recent months Roy Morgan’s index has taken a turn for the worst. The separation is thought to be attributable to the different measures used to create each index, and suggestions the ABS figures are likely to be lagging.

Rising unemployment is consistent with expectations. Falling house prices are hammering consumer confidence through the negative wealth effect, causing consumers to tighten their purse strings. With jobs underpinned by discretionary spending, and you don’t have to look to deep at the retail sector to see the consequences unfolding.

Do you expect house price falls to start accelerating this year with increases of unemployment? If so, by how much?

» Homes with negative equity on the increase – The Sydney Morning Herald, 20th March 2012.
» Property price falls lock homeowners into loans – Adelaide Now, 20th March 2012.
» Prudent Mortgage Lending Standards Help Ensure Financial Stability – Reserve Bank of Australia, 23rd February 2012.
» HOME OR BUST: Default fears as Australian banks return to high-risk loans – News Limited, 15th March 2012.
» Australian housing market just a jobs crisis away from collapse – The Australian, 19th March 2012.
» Home buy bargains – A Current Affair, 16th March 2012.


  1. I think we are near the panic stage of the housing market so a 10-15% drop for this year. A lot rides on China at were we are heading.

  2. So an RBA ‘expert’ has figured out that unemployment and falling house prices cause rising arrears and mortgage default. Gosh, really? No shit Sherlock, I never knew that. That has come as such a shock!

    The expert also says it’s something we need to be “alert” of – what language is that? Surely she means “aware” of. The future does not bode well if there is someone with the IQ of Luci Ellis heading RBA’s Financial Stability Department.

    As for her ‘expert’ opinions on the lending practices of banks – any child could tell you that. Bankers and politicians really are dumb aren’t they?

  3. If you were head of the economic stability department at the Reserve Bank of Australia, what would you do? If you told the truth, you would destabilise an economy no longer driven by fundamentals, but consumer confidence and government interference.

    Remember Alan Greenspan and Ben Bernanke testified before congress that the U.S. housing bubble didn’t exist, three months before the collapse of their housing bubble. It’s your job if you are a central banker.

  4. The Gold Coast is leading the way with multiple empty unsaleable highrises and top end beachside mansions already selling for half their purchase price in 2007. One iconic Hedges Ave house purchased in 2009 for $9.5 million has been empty for 18 months and may have to be demolished as it is in total disrepair. We should not be surprised if our housing market follows the USA with a further 40% drop in the next 5 years.

  5. Expect Australia’s housing bust to witness falls of 80% over the next 3 years.
    As I will soon be saying to my American friends, “That’s not a bust-this is a bust”.
    Remember, this is Australia and things are different.

  6. The U.S didn’t have Negative Gearing Tax Dodge on Investment Properties nor does it have excess mineral resources to flog off to China and India.

    No politician here in Australia will make changes to the Scared Cow of Negative Gearing so the market will deflate slowly. If by a miracle that changes are made to Negative Gearing the market will correct fully and in a short period of time.

    This is my theory and I will stick with it until the bitter end.

  7. The RBA might be forced to cut rates soon, to try and reflate the ponzi bubble.
    People suffer in silence, so the pain is felt with the glum faces in the shopping centres, the sigh’s of people not dining out anymore, sausages, bread and bake beans eaten regularly. Shit this sounds like depression stuf. I ask the panel of experts above:

    Are we in a depression by some measures already? A soft depression?

  8. There will be a global depression yes, so let’s all consider ourselves lucky that Australia has blue skies, wide open country to explore, stunning natural beauty and generally speaking – happy and positive people who tell it how it is.

    Now imagine being in the UK. It is overpopulated, decaying, with depressing weather and miserable people on the most expensive and over-crowded trains and roads in Europe. I know where I’d rather be.

  9. AverageBloke, Negative Gearing yes I agree. Mineral resources, are we the beneficiaries of them, or do we get the small cut? I’m getting the impression (which has been more wrong than right in the past) that in Australia property and property oligarchs (whom ever they are) are on top here, not mining magnates (they’re getting picked on by the Treasurer).

    I do see that the Government and the Real Estate industry going hell for leather to slow a decline to a grinding halt, and the people, Australia’s very own property feverous population will sacrifice their blood and children to help all they can.

    Not a pretty picture we have coming here for us. But the writing was on the wall, the large hand was slapping us in the face, the sirens were screaming, things were as obvious as the brick breaking through the window. And nobody saw it, despite the piigs flying in a dive bombing direction.

  10. I had to chuckle when the narrator said of the one property: “Bought for $1.7 million in 2008, it sold for $1 million less in 2011”. So, that would be, $700,000…a nice 60% haircut.

    30%, 40%, 60% examples in one broadcast.

    Granted, those may be extremes, and it’s a miracle anyone ever bought at all in that man-made canal development, where your property is likely to erode away eventually, but it’s still pretty impressive to see falls like that this early in the bubble decline. 100% haircuts in some areas, and I’ll bet Sovereign Islands is one of those.

  11. I think the price is going to drop like a stone. But don’t forget that no democratic government will stand by watching the nominal price to fall off a cliff. Expect massive printing. So we will do no better than the USA in percentage term when measure in any stable currency including gold.

  12. Great to see your work picked up by Business Spectator Craig. Hopefully, once the mainstream opens its eyes you’ll get a run there too.

    We do seem to be accelerating on the negative sentiment front and there are clear examples of bloodshed out there, but just the tip of the iceberg IMO. Looking at the index based charts of some of the overseas experiences, one highly consistent feature is the rapid decline from about 12 months in. We’re at that precipice now and our declines thus far have been generally more aggressive.

    Some of our so called saviours such as negative gearing and full recourse (bunkum) will eventually exacerbate our problems. Negative gearing might magnify the gains, but conversely it’ll magnify the losses and add further pressure to the feedback loop that will develop. And recourse, already disproven, but having people tied to negative equity, dead investments and lifelong loans, massively impacting their ability to otherwise contribute to the economy will be another anchor for us to drag.

  13. You can blame Negative Gearing, Central Bankers, Governments, politicians, etc, but at the end of the day unemployment is the key ingredient and as long as it’s contained within acceptable limits(<6%) then this housing bubble will take a long time to deflate. The next 10 years are going to be touch indeed…

  14. Factor in rising costs of fuel, electricity and water, these three factors could alone push the unemployment rate up as stay at home mums and dads, dole bludgers, pensioners or retired people are forced into doing some form of paid work (legit or cash in hand) just to factor in these cost rises prior to the carbon tax. Post carbon tax I expect rather high inflation levels up to 5-7% due to private debt becoming public and the effects of the tax itself, although the actual released figures will be more like 3-4% and property to remain slightly negative on a dollar by dollar basis due to no real wage growth in most major employment sectors having occurred over the past 2 years. (lets face it most people rely on penalty rates just to get by at the moment). Good luck, I have the feeling its a dead cat bounce at the moment in property.

  15. Paul wait till the Carbon Tax comes through…… Australia deserves it as majority wanted it well you got it….. Can wait till all you see in the MSM is whinging because the high cost of doing and the rest of the world laughs at the Aussie Govt idiots that voted it in…….

  16. “Do you expect house price falls to start accelerating this year with increases of unemployment? If so, by how much?”

    I do see property prices falling but I don’t think unemployment is the factor that will do it. Massive debt is.

    I know I have ranted and raved about unemployemnt here on every article that mentioned it but, I’ll go again. I don’t know why or how Roy Morgan’s count tracked the ABS’ (though RM was/is significantly higher), this is because if you see they way the ABS surveys unemployment, you will wonder what on Earth are they actually counting, and whatever it is they are, they [the ABS] are calling it the “Labour Force Survey”. This Labour Force Survey the ABS conducts,

    IS NOT:
    A count, nor sample, not even a look at CentreLink data pertaining to (lack of) job related benefits.
    The ABS does not venture anywhere near CentreLink (for good reason), and in their own words, receiving a CentreLink benefit has nothing to do with being counted as unemployed.

    A few Yes-No questions asked to a respondant that will result in three categories; Employed, Unemployed, Not Apart of
    the Labour Force.

    1. Are you over 15?
    No – Not Apart of the Labour Force
    Yes – Next Question

    2. Did you work 1 hour in the past week [the survey week]?

  17. My brother has been investing in housing since 1990. He has in the last few years done a 180 and does not want anything to do with it! Young Australians either cannot afford to buy or have educated themselves that now is not the time to buy. These beliefs coupled with a powerful global recession are going to decimate Real Estate in OZ. Negative Gearing will not stop it!

  18. Latest news from Queensland. In the far north 22.6% of homeowners are in negative equity according to RP Data. On the Gold Coast 19.4% are in negative equity. Sunshine Coast 15.5% and Brisbane has the highest negative equity of any capital city at 9.2%. Not a pretty picture for the Sunshine State

  19. It appears that the Bank of QLD is in a bit of a bother with it’s loan book, many loans are not doing so well now, in fact they have reported that “Bank of Queensland expects to post a $91 million first-half loss because of a large increase in impairments on loans”.

    “BoQ says it plans to strengthen its balance sheet by selling about 74 million new shares, which represents about one-third of the shares it currently has on issue”

    So there you have, the first bank in Oz to now post a 6 month loss in recent years, I believe the last time this sort of situation existed was during the last big recession we had to have in the early 90s. If a bank has to increase it’s share base by a third that is quite serious….. talk about shareholder dilution. In general when things start to fail the smaller ones will fall first, this is to be expected due to a smaller an weaker capital base.

    Who is next?

  20. Housing price increasing have not started yet…Keep buying while the Spruikers are Selling theirs…and when its Carnage and GFC REAL for Australian…….the Spruikers goes back and buy your loss…..more 1st home owners grants….more building Australia Revolution waste. House price is Cheap and Rentals are rising so the brain washing goes….what is a 10% drop…..we have a housing shortages…….

    Lets hope this time when the Spruikers goes in and buy the price of houses drop another 40% because China so happen to crash….then the true Aussie can buy them at a similar discount like USA are doing now……from $500,000 peak to $160,000……. and its good people are leaving Australia…..and less need for student housing because better and cheaper fees at UK or NZ…….This is not the bottom…..nor top in property value…its in no mans land and good luck to you buyers or sellers…

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