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.”
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.