The global financial crisis started when the US housing market collapsed
Firstly, it is important to understand that Australia has one of the most highly regulated mortgage industries in the world. Ask any business owner with less than 2 years history self employed and you will understand that our banks take risk management seriously.
It was the American banks that came up with the idea of “NINJA loans” – loans given to people with no income, no job or assets. Just the people that a risk averse bank would try to avoid!
Additionally, there were banks that were willing to lend up to 105% of the purchase price and were signing buyers up on very low interest honeymoon rates.
The borrowers didn’t need to have any deposit or equity and only needed to show a token salary to cover the discounted honeymoon rate for the first couple of years. The bank was even generous enough to pay for the transactions costs, including the lenders mortgage insurance.
No wonder that from the 18 safest banks in the world, of which Australia’s “Big 4” are all highly placed, not one is American owned.
In Australia, any person that has borrowed money will know that you virtually sign your life away when you enter a mortgage.
Not only does the bank have the right to seize the property if you default on your mortgage repayments, they also have the right to sue you for any losses that they incur if they have to sell the property for less than the outstanding loan amount.
American lenders were providing “non-recourse” home loans to these NINJA’s.
What this means is that if the borrower can’t meet their loan repayments then they can move out of the house and hand in the keys to the bank without the bank having any means of recovering their losses from the borrower.
The American mortgage market was clearly working without much regulation and the result of this was that anybody that could sign their name on a piece of paper was buying property. As a result, this pushed prices up quickly which only fed the flames further as developers started pushing out new projects which investors snapped up off the plan in the hope of making a quick buck.
Unfortunately, when these thousands of new houses started to reach completion it became apparent that there wasn’t anybody to live in them. Vacancy rates jumped to more than 13% in some cities and investors started walking away from their purchases (who wouldn’t if the bank had no means of suing them???).
The property market crashed and as prices fell more and more people walked away from their mortgages – they actually had house burning parties in some streets!
Compare this to the modest Australian market where the government estimates a shortage of almost 200,000 homes nationwide, a shortfall which is growing every year as our population has been swelling while our construction volumes have not changed for 10 years.
In fact, the Housing Supply Council of Australia estimates this shortage to reach epidemic levels by 2029 when the gap between housing supply and underlying demand will be 640,600 homes.
Furthermore, our rental vacancy rates have been hovering between 1.5% and 2.0% for the last 3 years, with localised fluctuations around the capital cities at various times.
Don’t hold your breath waiting for the housing market to collapse.
Expect to see short term (3 to 5 year cycle) fluctuations.
With interest rates trending down, a low unemployment rate, inevitable population increase (as Australia cannot compete on the world stage without sustained population growth.)And construction short fall.
All the indicators point to a steady ( with some short term fluctuation) property market.
The Australian dollars for the short term is a little strong.
Inevitably as the American economy picks up steam, and our interest levels are adjusted to a more realistic level.
The Australian dollar will depreciate.
We will see the domestic economy pick up pace and the rest of the sectors do the same including the property sector.
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