A housing boom that generates easy money, with more to come
The best kind of prophecies to make are self-fulfilling ones – they’re most likely to be right.
So this is the case with banks competing with each other to make the most bullish house price forecasts – the forecasts themselves help drive up prices.
The banks that make the predictions are also more aware than anyone of the type of deposits that are in customer accounts, how much more they have made borrowing easier, and that lending standards are about to be relaxed even further. .
When your bank tells you that house prices will increase by 20% over the next two years (like Westpac did last month while you have money in the bank and earn two-fifths of everything and this bank will be absolutely happy to lend you a larger amount without looking as closely at your spending history as before, well , what is the number of this real estate agent?
The banks themselves have been kissed by a rainbow, having built up much larger provisions for bad debt last year than was necessary.
They’ve taken the economic turn with money on the sidelines, nothing is happening in terms of business loans, and the Reserve Bank urging them to take as much as they can from their Martin Place vault and donate. an official blessing for soaring house prices. .
So the executive bonuses this year will come from pushing as many residential mortgages as possible. Come and get it.
Too bad the short-term boom contains the seeds of major problems on the track. I will come back to this.
However, first, comments from mortgage brokers are that money does indeed flow much more freely – and this is ahead of the government’s plan to further relax responsible lending rules at the end of this month. . (I am probably in the minority of commentators who believe that people have the right to take a loan risk., but there is an additional danger during a lending frenzy.)
Real estate consultant and commentator Michael Matusik’s latest newsletter reports a conversation with an anonymous mortgage broker who identified contributing factors, including the impact of banks reducing their shutdown rates for loans, reversing greater caution which they had adopted last year as the pandemic unfolded and changing their attitude towards including retirement pension withdrawals as part of “savings.”
Super withdrawals that were supposed to be meant to alleviate hardship can now be used as part of a “with a few low-level caveats” deposit. Tim “Franking Credits” Wilson must be delighted with this contribution at higher prices.
According to the anonymous broker, the decision to lower the interest rate used last year to assess the viability of a loan means that “a household’s income should now be only $ 70,000 per year, down from 110 $ 000 to afford a house of $ 450,000 “.
I submitted the allegations to mortgage broker Chris Gillis. He disagreed with some details, but supported the idea as lenders rolled out the conservative policies adopted when the pandemic hit.
“Some lenders have stopped lending to people working in certain industries – tourism, aviation, hospitality – and some have stopped lending to people who have applied for COVID-19 government assistance like JobKeeper,” Gillis said.
“Lenders have started demanding more documents than were previously needed to confirm that income has not been affected by COVID and many lenders have increased their degree of shadowing for certain types of non-base income – bonus, overtime, commission, rent. “
Most lenders have implemented a policy that prohibits borrowers from treating COVID-19 super withdrawals as real savings. Now, most of those policy changes have been reversed.
“Even borrowers applying for a high valuation loan could probably use the funds taken out of the super for a purchase, which could help heat up the real estate market, but I don’t think that would be a factor.”
Mr Gillis said lenders were using a 7.25% appraisal rate until APRA removed its 7% floor rate in July 2019.
Since then, most have used the highest effective borrowing rate plus a 2.5% cushion or floor rate typically between 5% and 6%.
The floor rate had limited the increase in borrowing power. He gave the example of a single person with a salary of $ 70,000 without any other debt deemed capable of repaying a loan of $ 400,000.
“With the current 5.75% lower premium rate, the borrowing authority of the same client would now be $ 480,000. “
Mr Gillis said that banking economists’ forecasts of strong housing price growth contributed to a feeling of FOMO (fear of missing out) for many borrowers.
Along with general sentiment turned more positive, low interest rates, funds being saved while being more cautious last year, he also cited clients appearing to place more importance on a larger home.
In addition to the abundance of demand and cheap money to find a home, Matusik writes that supply is tight, influenced by COVID restrictions.
“The media echo chamber boosted demand momentum, headlining positive real estate press releases, in part to help increase reader traffic to their digital real estate advertising portals,” he said. -he declares.
“As a result, buyers are crying out to enter the market, as evidenced by recent weekend auction close-out rates of over 90%.
“This could be good news for households who own their homes, either directly or with a mortgage. However, it might not be so good for those trying to enter the housing market. “
And then there is the little problem of the boom that does not last.
Mr. Matusik brings together the usual suspects: high and persistent unemployment and underemployment; lower population growth due to the collapse of immigration and the decline in the birth rate; potential overbuilding mainly due to HomeBuilder; rising construction costs; increase in supply; and then there’s the big problem – weak wage growth.
“Limited wage growth is the big drag on substantial house price growth.
“There is a close and long-term relationship – causation and not correlation – between wage growth and rising home values in Australia.
“I don’t see how future first-time buyers will be able to afford such high house prices given the low wage growth. Borrowing the difference has only a limited lifespan.
And all this without getting into the impact of increasing inequalities and the damage done to both the economy and the society of a nation.
Take advantage of your officially sanctioned boom if you are one of the lucky ones – while it lasts.