It "Hit The Mortgage Market Over The Head With A Baseball Bat"

Authored by Wolf Richter via,

8 'boots-on-the-ground' findings from Sydney’s deflating housing bubble...

Australia’s housing market is getting rattled. The mortgage industry is in turmoil. Banks are battered by incessant revelations of misconduct.  Home prices in the Sydney and Melbourne metros, after surging to an astounding degree, are deflating. And the once splendid and vast game of real-estate speculation just isn’t fun anymore.

Lindsay David, of LF Economics in Sydney — who has long played a role in exposing misconduct in Australia’s banking system including, in early 2016, by calling for a Royal Commission investigation into the mortgage sector — put some findings of his boots-on-the-ground analysis into a note to clients. Here are some of them:

1. Drop-off in Speculative Demand:

“We spent countless hours” in recent months “observing buyer turnouts to scheduled property inspections of houses for sale,” he writes. “While there may still be a small sum of properties on market that continue to see very large turnouts, there was a clear visual drop-off of engaged interest from buyers and indeed ‘property snoops’ across the majority of properties for sale that we had observed.”

“On many occasions, we observed either no interested parties, or less than 4 parties inspecting a property across a very decent chunk of offerings on the market,” he writes. “This lower rate of turnouts was something we simply had not observed over the years at such a dramatic scale.”

2. Sharper drop in selling prices than shown in official data:

According to CoreLogic (the official data), home prices in Sydney fell 4.6% in June compared to a year ago, with house prices down 6.2%, and prices of condos down 0.7%. In the most expensive quartile, prices fell 7.3%.

But Lindsay David writes: “It is our view based on all the resources made available that house prices in the Sydney area have broadly fallen somewhere between 11% and 15% over the comparison period.”

3. Sudden eagerness by property agents to negotiate

“We also observed a systemic increase in property agents’ willingness to negotiate and follow up on the majority of very low-ball offers made for properties they are selling. This negotiation approach for buyers was simply not possible twelve months ago,” David writes.

4. Less access to “Jumbo Loans” because rules suddenly matter to banks (a little):

David writes in the note:

As we have always argued, Australian banks had for years been flooding the housing market with “jumbo loans” that were well in breach of the National Consumer Credit Protection Act 2009 (NCCPA). When benchmarking the ability now to ascertain a loan outside the scope of the NCCPA, it appears the majority have lenders are now simply skirting in and around the laws of the NCCPA versus the outright disregard of this law, which for many years was industry standard.

This shift in lending practices brings lenders closer to the rules of the law and thus resulted in a significant reduction in the overall borrowing capacity of your standard Sydney property buyer. Sydney property buyers were leveraging at the highest ratios in the country (indeed globally) on the back of the easiest of lending environments. This now more broadly appears to be in the past versus the present.

5. The Royal Commission did it:

In 2017, the Australian government finally and reluctantly established The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, as it’s called, to investigate and report on misconduct in the financial services industry, particularly in the mortgage sector. It found a treasure trove of misconduct and “continues to expose cases of bank malpractice,” David writes:

The publicly released evidence provided consensus that our research into illegal conduct and regulatory capture in the mortgage market was spot on. We anticipate captured regulators will struggle to release the noose of the banks borrowing power without repercussions.

Under scrutiny, banks are now curtailing some of these practices and some of their riskiest lending, such as interest-only mortgages to investors who cannot afford them, and this has caused lending conditions to tighten particularly for speculative buyers.

The changes “appear to have hit the mortgage market over the head with a baseball bat,” David writes. “In our opinion, this is the primary reason the Sydney property bubble got pricked.”

6. Underwater interest-only mortgages:

Property price declines hit interest-only mortgages the hardest because there may be little or no equity cushion. Once a home is worth less than the mortgage, and is thus “underwater,” it cannot be sold because the proceeds won’t suffice to pay off the mortgage. Investors, often with negative cash-flows in the property, are stuck contemplating doom and gloom.

7. “Non-transparency” increases sharply

“The Sydney housing market is synonymous for non-transparency,” David writes. “We have continued to observe an ever-increasing lack of transparency when it comes to house prices (asking price and sale price)”:

  • More properties that are for sale are advertised without an asking price.
  • The number of transactions where the price is not disclosed has surged. This also appears to be the case in Sydney’s weekly auction results, thus preventing the median sale price at auction from falling faster than what it likely has in reality.
  • On many occasions, properties are being put on market only to be taken off market two or three months later. However, many of these properties are still for sale, but no longer advertised or have a ‘for sale’ sign posted on the front lawn.

“It could be argued that the property culture in Australia is to make sure everyone knows how high houses are selling for – unless the market is falling,” he writes.

8. Local Media, hooked on real-estate & bank ads, downplay Bad News

“The local mainstream media (MSM) have made great efforts to play down the systemic nature of the early findings of the Royal Commission along with the fall in house prices in Sydney,” David writes:

‘House Prices will fall, but not crash’ is the chorus despite Sydney house prices falling through the floor on the back of rising funding costs and weakening credit conditions. No doubt, revenues from real-estate and bank advertising remain a critical revenue component for Australian MSM news sites, relative to their international peers.

Humorously, the MSM has also begun to turn their attention on smaller housing markets that are showing signs of strength and increased credit expansion, such as Hobart, Tasmania, which has a population of just 220,000.

And the bottom line?

There are repercussions. Lindsay David, from his perch at LF Economics, concludes the note:

We stand with the view the Sydney housing bubble appears to have been pricked, and we are confident that house prices will continue to fall at a moderate to fast pace over the coming months. This should eventually have knock-on effects to the banking system and its stability and ability to maintain profits.

Furthermore, we can expect the residential construction sector to feel the pressure as more developers come to the realization that there is now no real profit to be made in a falling market. In a feedback-loop economy so reliant on rising land prices, the risk of eventual job losses filtering through the Sydney economy appears to be on the increase which could easily spill into the broader Australian economy.

But even the official reports are no longer brimming with optimism. “Recent home buyers could be facing negative equity,” warns CoreLogic. Read… Update on Deflating Property Bubbles in Sydney & Melbourne 


JoJo Kracko the_river_fish Sat, 07/14/2018 - 12:45 Permalink

The ZH article is kind of misleading.  So is the 'thistimeitisdifferent' linked article.


Yeah, Vancouver might be at the top of the list, but it has always been the most expensive city in Canada, due to a whole bunch of factors.   It might fall some but it isn't exactly going to crash super hard. It will continue to be the most expensive city in Canada no matter if home prices move up or down going forward.   Toronto has been in the same situation in Canada.  These two cities don't define the country and their level of mortgage debt, just like San Francisco and New York don't define it for America, or Sidney for Australia.


That said, take a closer look at the stats, especially from the link.   You will discover that Australia has $71022 Australian dollars worth of mortgage debt per person.   Canada has $42160 Canadian dollars worth of Mortgage debt per person.  America has $45682 US dollars worth of mortgage debt per person.  Yes, you read that right.  Canada has less of a problem than America.  (contrary to every sensationalist article ZH has run over the past year or so about home price problems up north)


Now since the Canadian and Australian dollars are roughly worth about 75% of what a US dollar is worth, Australia is currently running at $53266 US dollars per person (equivalent), and Canada is running at $31620 US dollars per person (equivalent) worth of mortgage debt.


SO ... in a way, YES, Australia has a massive bubble on average per person, but Canada is running way below the debt level per person in equivalent dollars than the average American.


FWIW, most of Canada, other than the Vancouver and Toronto areas, are up less than 10% in the past decade.  Some parts, like Alberta, are actually flat over that time frame.   Bubble yes, but only in two tiny parts of the country.

In reply to by the_river_fish

tribune Fri, 07/13/2018 - 20:11 Permalink

for the long term health of australian society, the housing market needs to crash. this will allow new entrants into the market, and lessen the odds of the millennials smothering the baby boomers in their nursing homes. there is too much angst about keeping prices rising. markets rise. markets fall. markets need to fall sometimes. but aussies are deeply ignorant of markets

keep the basta… tribune Fri, 07/13/2018 - 22:35 Permalink

Fuck off twit. Australians prefer to have a roof over their head not shit in the street.

There is no choice when mouldy dark nasty negatively geared rentals with 2 bedrooms are offered at 850 per week and there are 200 desperate professional or equivalent steady people wanting to rent.

Then it’s to banks sharkfest and buying with terrible mortgage just above rental price. 

been to  lots of auctions last year, with big cRowds and lots of 30 year old couples with a parent of one of them, and house goes for 2.5 million instead of the 1.5 million.

In reply to by tribune

surf@jm Fri, 07/13/2018 - 21:47 Permalink

And what happens is local governments will cry a tsunami load of tears over declining home prices hurting their tax revenue, so the central bank will devalue the currency some more to compensate.....

dojufitz Sat, 07/14/2018 - 00:50 Permalink

In Melbourne last night on the radio a bank is going to start asking their potential much do you spend on cat food? much on alcohol? much on child care a week?.....because none of the living expenses of borrowers were factored in to prior loans they want to itemize your living expenses now and most likely tell can't afford the over.

StackingSilver Sat, 07/14/2018 - 04:25 Permalink

The Royal Commission is hobbled because of the terms of reference - no investigation into regulatory bodies and their failure (APRA). The goverments' supposed ability to protect the average mugs' deposits is not so - the government has the ability to do so when the power is activated. It has not.


Who set the terms of reference for the RC? Malcom 'Goldman Sachs' Turnbull. Our traitor of a prime minister


It's all part of the game.... problem, reaction, solution.


Hang the banksters.


Look at the videos by the Citizens' Electoral Council re: Glass-Steagal like legislation proposals in Australia. We need people to write to their MP's and DEMAND that they support it. If they don't, vote them out!


Get out of the speculative bubble. IMHO the signs of impending collapse are now being shown. Those with insider knowledge are already out. Those who watch TV and read Murdoch newspapers for the information, drowning in debt and ignorance, are beyond saving.


Buy gold.


Buy silver.



SmittyinLA Sat, 07/14/2018 - 06:14 Permalink

Seeing this coming was a no brainer, Australia has room for tens of millions more new houses, the only obsticle is cockblocking government. The next phase is mountains of municipal bond debt from servicing Australia's free shit migrant army.