I must warn people from Australia with one Seeking Alpha article I just put out. Hope this will stand for your benefits, since I don't make any money on Seeking Alpha articles. I know some of you are from Australia.
If you have a house and need the money from it, you should sell and rent now. What the banks are doing there is ludicrous. This is a warning for all home owners and potential buyers in Australia: <snipped link>
Thats just insane, and something I wouldn't put past any bank.
How in the world can people think it might be beneficial to them to just constantly keep paying interest on mortgages and not ever actually get it paid off?
Don't they realise that all it takes is one bank to call in those loans and the whole house of cards will fall around their ears?
Sparhawke, here's the original article, and it's not a new idea - the article says it's been popular in Europe and the UK for years.
http://www.news.com.au/money/property/r … 5870019522
You're probably not aware that banks are more highly regulated in Australia - not one Australian bank had to be bailed out during the GFC and none of them failed.
House prices are quite high in Australia but mortgages work in a completely different way to the States and we don't have the same sub-prime problem.
Marisa, I don't believe that is correct. I do believe that there is a massive bubble, and the last ones on the boat will have the riskiest loans. It is not a question about the regulation of the banks, but rather about the risk to the homeowner. Yes it is true that Australian banks are highly capitalized, but that will change if this ponzi crashes.
As far as Europe is concerned, we are having a potential meltdown with banks being leveraged in Germany over 60 to 1. This is insanity.
And in Canada, another bubble housing markets, they are allowing people to pay 2/3rds of their income for a house. This is also insanity.
I agree with you. So far some of those countries managed to keep their troubles (recession blues) under wraps (including India). So, as you say, when (if) that bubble bursts, it will be harder for them. And real estate will be one of the most affected area.
PS: I am a subscriber reader at seeking alpha
bgamall, considering that I live in Australia and am an experienced property investor, I think I'm probably better qualified to comment than you.
If you have evidence that there's a ponzi scheme operating in Australian property, I'd certainly be interested to see it.
It is called the law of gravity Marisa. At some point fear will replace greed. You see at the chart that this has gone way beyond the US housing bubble. I suggest you at least consider taking some profits off the table. You are playing a very dangerous game.
Hi Sun Seven, glad to see you are at Seeking Alpha. If you wish to comment on my article good or bad feel free.
Marissa - you are being deliberately mislead. These mortgages are NOT popular in the UK and Europe.
What has been popular is an interest only mortgage, backed by an endowment policy which required separate monthly payments - this endowment - when it matured - was supposed to repay the capital.
I say "supposed" because this system is in the process of collapsing along with the financial system and many people are discovering that their endowment does not in fact cover the outstanding capital after 25 years of payments.
The reason house prices in Oz are insanely high is because the banks have provided more and more easier to qualify for loans.
No one seems to appreciate that the banks determine the price of houses by increasing or decreasing the money supply.
I agree with bgamall - it is an enormous bubble that will eventually burst. When? Hard to say. But burst it will.
The intention of the banks is to own all property - which they are doing - one way or another.
I had an interest only mortgage in the UK for many years, it was backed by my pension and then when it became clear that the penison investment was not going to be enough at the end of the loan period to pay it off, I had to take out an endowment. You get out of these arrangements (if you can afford to) when you realise that you are effectively only paying 'rent' to the bank for your property. The situation is exacerbated by the fact that these loans are typically taken out by people who cannot afford the straightforward repayment mortgage for their property, and therefore have to pray that their house has increased in value enough to pay off the loan when they sell it.
If Australians are taking out these types of loans without further investment to back them, they need to get out now. The banks can recall those loans at any time, and if housing prices crash it could mean financial disaster for many families
well said Mark as usual your on the button !
Thanks for the clarification Mark - not that I'd ever be tempted by this kind of loan anyway. I had an endowment mortgage when I lived in Scotland so I know what you're talking about.
You're right that banks had been getting silly about offering 100% loans before the GFC - mainly because they were trying to kill off non-bank competition. Non-bank lenders were never allowed to lend more than 85% of the purchase price and had to get independent valuations. The banks have now tightened up too.
There was a widespread expectation that prices would fall somewhat after the GFC, but it didn't happen because there is such a shortage of homes.
The financial crisis has meant builders can't get credit - so in spite of attempts at stimulus by state governments, there just isn't enough building going on. When there are more buyers than available houses, a price drop is unlikely.
The other thing driving up prices is the shortage of rental accommodation - when interest rates were high before the GFC,and first homebuyers were clamouring to buy, many investors sold up. So rents are also very high, making the market attractive again for investors - although personally, I think the prices are too high to buy right now. I do think there will be a correction but in view of the housing shortage, I don't see how it could be a catastrophic one.
Marissa, Mark stated the English mortgage dilemma accurately.
As far as the crash taking place with regard to a scarcity of homes, it just needs less household formation. As more people live with relatives, less household formation reduces demand. At some point people will be schooled not to take out the no money down loans but to stay with mom and dad.
It ultimately relates to income too. If income stagnates or does not keep up with the values of homes, what happens is that sooner or later, the smart money will get out, the investors will be afraid of the mortgages failing, and then you will have the queen mother of all crashes. I realize that income in Australia is stronger than most places due to the proximity of China, but a lot has to do with population growth as well.
If commodities decline in value, Australia will feel this along with Canada.
This already happens in Australia on a large scale. It's becoming normal for young people to stay at home into their thirties because there's simply nowhere for them to buy. And it's not possible to take out a "no money down" loan in Australia.
What's interesting is that but for this thread, I wouldn't have known about the perpetual loan at all. I can't even find any mention of it on ING's website. Strange.
There's another factor..., Australia has an increasing housing shortage, predicted by some to quadruple by 2020. This also, is contributing to keeping prices artificially high.
I'm with Marisa. Housing markets rise and fall, and yes, sometimes there are bubblesthat have to self correct. Most international studies show that housing in Australia is very affordable.
Unfortunately on some occasions people who cannot afford to purchase are lured into purchase with lower start-up interest etc... Eventually when the interest rises to REAL terms, they default.
At the moment, interest was lowered because of the GFC, and is back on the rise now. When people commit to a mortgage, they have to expect interest rates to rise and budget for that.
Some shonky operators do lure people in, and some cannot cope with interest rate rises, but on the whole, housing is pretty stable and overly regulated.
as long as the population increaes which it has done each and every year ive beenhere 35 years house prices will contiue to rise..period.. they may stabalise bu then they shoot up in other years..trust me i watch it very closely...
Population increase can help. But family formation is key. At some point, when the prices flatten out, the guy who buys no money down and pays interest only will have no incentive to pay, except for the most desired areas.
So, for example, prices in the bay area of San Francisco have tanked, but prices on the peninsula itself have seen only minimal decreases. Stimulus has kept all this higher than it should, and there could be a double dip in the US. Apparently China has failed to control prices as well and is trying to do so now, but half heartedly.
The perpetual mortgage remains an absurd concept.
non of those conditions apply to Australia
Excuse me? The reason people offer a perpetual mortgage is for the express intent of keeping a ponzi going. There is no other reason to offer a mortgage you cannot pay off.
I choose to differ in my views sorry about that...
The mainstream media that earns money from property advertising will tell you there is a housing shortage, the data modellers that sell their reports to real estate agents will tell you there's a housing shortage, the banks that sell you mortgages will tell you there's a housing shortage and of course the real estate agents will tell you there's a housing shortage. If enough people say the same thing eventually people will believe it, no matter if it is true or not. The housing shortage is a lie. It was a lie in California before the US property market died and its a lie in Australia, perpetuated by parties interested in keeping prices high. The REIV is reporting that 1200 properties are flooding the Melbourne market this weekend. This is the beginning of the end, these people realise that the game is up, and its time to cash out.
Again I think this is a sweeping statement from both for and against rental property shortages.
Human nature is that people won't pay more for something than they have to. Renters make much less emotional decisions that home buyers since they know its easier to move on.
I can only quote my experience on property renters and my rent has basically increased by about 25% in the past few years and I can only put that down to demand. These properties are in good areas but small properties and when ever I have had to re-rent they have been filled within 1 or 2 weeks and with more rent than before?
I am with Barry on this bgmall.
I am english and lived in Sydney for 13 years before living the last 3 years in LA.
The Aussie property situation is very different to what happened in the US as any idiot could get a loan and people were buying 2 or 3 properties with no money down when they could even service 1!
I am keen to understand what you believe the Ponzi scheme is in Au as you haven't yet explained it?
Australia is lucky to have China and India which will continue (with bumps in the road) to be a major contributor to the economic growth. Also Australian property and growth often gets put into one big story of growth when its not true...I have a number of properties in Oz which have grown very steadily and about 6 - 8% per annum and currently have a yield of around 6% in the heart of Sydney...but its hardly electric and just a long term investment strategy.
Our some prices over prices in AU...YES and they will correct but not all.
Having lived in Europe, Australia and the US... Australia has a significantly superior living standard and much safe culture and more and more wealthy people in the world will see this as a nice SAFE place to live out their years which will continue to drive population.
On that note the AU government have the ability to turn on/off immigration when they want so can ensure the flood of new immigrants (and their money) matches or continues to drive the economy...not to mention the on/off switch on overseas buyers.
They are not immune ti global financial meldowns but they are better prepared than most! :-)
The population rises every year in the UK too, but that didn't stop the crash in 2008 did it? Some homes saw 40% wiped off of their values overnight. If credit markets fail then money is not lent, and jobs are lost. Repossessions increase as a result of job loss, with properties going through auctions at far far 'below' market value. Only these auctions are a reflection the true 'market value' and as a result the whole market falls further.
If money is not lent then there are no new buyers. There is demand there in a certain sense, but the 'demand' cannot meet the asking price of supply, the result it 'price equilibrium'. In other words, the price of the supply falling to meet the abilities of the demand.
I sat and watched the UK market go through this vicious circle throughout 2007 and 2008 whilst gaining a first class degree in property studies. A great time to be a Real Estate student.
So what is the danger of a burst bubble? For most people it simply means that the value of their property has fallen, they realise that they really dont have much seperating their debts from their assets. Many people plunge into negative equity, it means that you are stuck with the property for a while, end of.
For others it means losing your home. Hundreds of thousands, possibly millions, of people are still in substantial negative equity in the UK, they are effectively paying their mortgages each month in the full knowledge that they cannot afford to sell their house.
Millions of people in the UK are effectively 'insolvent' and the only way through for them is to continue paying their mortgages in the hope that the credit markets will begin to lend more freely, thus pushing up prices again. The thin line between technical insolvency and formal insolvency is a job loss. No lender will give a payment holiday to an unemployment man in this climate.
Its not the biggest disaster, its a market readjustment, but if Australian financial institutions have been lending at 100% then this exact same situation could realistically happen in Australia. The market in Australia is very similar to the UK with regards to the proportion of income spent on properties and the credit systems. A 100% borrower with a 5% deposit would only need a 10% fall in prices to have a loan for more money than the value of the house.
If you have the equity to take a big hit, say 30% off of the value of your home, and you have no intention of moving on - then by all means stay put and see it out if it happens. If you have 5% or 10% equity on your home and very little by way of savings, then perhaps private rented really is the place for you.
The early signs are there Marisa. A 1.8% fall in the number of home loans provided last month. That is precisely how it starts, the restriction of credit. That only needs to be a 5% fall in the number of mortgages agreed one month, and then a 10% fall the next month, and suddenly the entire market is in chaos.
Consider your current interest rates, what are they now? 4.25%? going to be rising to 4.75%? This interest rate has been increased five or six times since the end of 2009. Somebody who took a 100% mortgage on a $300k Aus house at an interest rate of 3% last year is now paying a hell of lot of more money monthly. There is a very thin line between solvency and insolvency in any country which offers 100% mortgages, particular where they increase interest rates that rapidly. If they carry on at that rate it will take new buyers 5 years to build any equity whatsoever.
Homes are really not that cheap in most developed parts of Aus.
Australian banks do not make 100% loans. Non-bank lenders can't lend more than 80% of the value of the property. The banks were doing a lot of wriggling around the regulations at one time, but that all stopped with the GFC so credit has been restricted for quite some time now. Especially for developers, who can't get the finance to build new stock which is leading to more housing shortages.
I am expecting some drop in prices but there is no sub-prime market in Australia - that kind of loan simply isn't allowed - and as you know, Australia's economy is in much better shape than either the UK or the US, so I don't believe it will be as extreme.
We definitely had it much easier, we could get married quite young and buy a house, but house prices these days, sheesh...
Our housing market has issues but not from ponzi schemes. It's very heavily regulated & our banks may rip us off left and right but they don't have much wriggle room to cause the kinds of problems experienced by the US. The greed is tempered by legal restrictions.
The housing shortage and sky high prices are an issue and there's been concern about preventing a housing bubble for ages. It's monitored and dealt with on an ongoing basis.
We've been very lucky in this crisis - we're moving into a surplus budget and there was no real recession / no major unemployment dip. Events elsewhere affect us though - the Euro zone issues have given the Aussie dollar a good smack.
Oh well - so much for dollar for dollar Ebay buying ..
I cant agree. Someone I know just bought in Glen Waverley in Melbourne for 1 million needing $200,000 spent on it.
I reckon it will be worth 1.5 within months. The high rental prices and public transport travel times are the clue to house scarcity and that is what drives this market. It will continue to rise in the cities as there are less vacant blocks to build on in the city areas.
If that is the case, Earnest, they don't need the no money down perpetual interest only loans to keep it going. Once it is necessary for ING to offer those to keep it going, there has to be a crash. It could be years, but it will come and it will be devastating.
If the crash is years away I suggest you invest and ride the wave! :-)
Actually, there may be the shore coming up. Read this about the bank workers and their fears in Australia that people can't pay back their loans. http://www.theage.com.au/business/bank- … -xudq.html
That article is conflating two different things.
It's absolutely true that many Australians are carrying too much debt, in the form of credit cards. People are still able to get away with applying for multiple cards and get their credit limits increased beyond what is sensible, which is simply crazy.
As martyk said, "The Aussie property situation is very different to what happened in the US where any idiot could get a loan and people were buying 2 or 3 properties with no money down when they could even service 1!"
I have two investment properties and haven't been able to buy another one for some years, because I don't have sufficient downpayment or income to service the loan according to any bank's criteria. Which is annoying in some ways, because I have come across properties where the rent would pay for the loan - but that's not enough for the bank.
Does that sound like the banks are giving away mortgages?
And by the way, I still haven't managed to find a single other report about this so-called ING Perpetual Mortgage - are we sure it wasn't just a hoax?
I blame the banks for allowing people to borrow incredible amounts for a housing loan. Knowing full well that they will never be able to pay it.
Years ago loans were regulated and you could only borrow money, which the repayments were worked out to be only a percentage of your wage. That was much more sensible.
The banks in my opinion offer loans any type of loans to people and wait greedily for them to falter and then buy the home back for a measly percentage of the real worth.
They do not care about the people they are just numbers on a piece of paper.
Just like the number crunchers that earn phenominal wages to get rid of staff and then put more pressure on the other staff. they do not care about the suffering caused. They get their millions so why bother.
The world has gone to pot. and its like guilty or innocent. it doent matter any more it is just the best paid lawyers wins the cases. nothing more nothing less. Have a nice day everyone
Yes, the banks have continually scammed us. I write about this alot. My view is that households need to protect themselves, even by walking away from debt if they can, as banks deliberately are giving ponzi loans and usurious credit cards.
I have a question for Aussies: Can you find out if the ING perpetual loans are for refi or for new loans?
No, Marissa, ING is part of the Rothschild central bank cabal, with Baron Lambert of discredited Drexel, Burnum and Lambert being the primary owner before his death in 1987. ING was called BBL. ING is a very powerful entity with a very powerful family, maybe the most powerful family in the world, behind them.
So, the link is: Lambert was a great grandson of Baron Rothschild. You better take them seriously, Marissa, as they are ruthless.
The bubble will be revved up if these loans are for new purchases. That is why I want to find out if they are for those or for refi's.
Bgamall, I know what ING is. It has a fairly big presence in Australia.
The point I'm making is that I can't find any mention of this supposed new ING loan anywhere, in any other Australian media, or on ING's website. Can you give me any evidence that the single article you quoted wasn't just a hoax?
I'm not sure what you mean by a refi, please explain?
Ok Marisa, here is the link: http://www.news.com.au/money/property/r … 5870019522
However, a reporter in Australia who I have been corresponding with called ING and they say they have not yet decided to use the loan yet. Ha.. But Marissa, watch them like a hawk because if this loan is deemed necessary, the bubble will likely crash at some point. It is all about gravity. Once people have no skin in the game, they will walk away.
Also, Marissa, a refi is refinance. But the article above does imply that they were going to use the loans for new purchasers. They will be captive to a bad loan. They will walk away if appreciation slows.
Bgamall, you've just quoted back to me, the link I gave you!
It may belong to News, but the Sunday Telegraph is a local (Sydney) tabloid newspaper which doesn't have a great reputation for checking its sources. The fact that it's the only paper in the whole of Australia which has reported this...
However, since you've spoken to a real person who reckons they've spoken to ING, I guess I'll have to take it as genuine. I'm sure if they do decide to launch it, ING will make sure it gets a lot of publicity so I'll know about it.
I know refi is short for refinance, but I'm not sure whether it has quite the same meaning in the States as here.
But they know that bubble vigilantes are watching this sorry ING. They will steal but only if they can get away with it. If you see it come to pass, you will see the bubble on its last legs. Just remember, these are crooks. Writing a loan that people cannot pay back is fraud, IMO.
Sorry for the link problem! I got it from my article original.
So did I. That's why I was wondering why you quoted it back to me, when I asked if you had any other reports.
I say again, it appears to be the only report on this supposed loan in the whole of the Australian media. So leaving aside the general discussion, the loan itself is beginning to sound like a figment of someone's imagination.
Lol, Marisa. Sorry, I am tracking a lot of stuff. Brain overload.
But it is not a figment because my Australian source, a reporter for another company, said that ING was thinking about doing the perpetual loans, but have not decided. So it isn't a figment. He called them today.
Hey Marisa, I may have hit the jackpot for you. Now that easy money is gone for financing infrastructure products in Australia, they want to raid your superannuation (retirement) funds. The fund managers are wary but the biggies, Earnst and Young are working to find a way for the ponzi in infrastructure to continue at the risk of retirement funds.
http://www.ey.com/Publication/vwLUAsset … estion.pdf
Here is something that could help you from an Aussie blogger who corresponds with me:
"Gary. The investors I'm referring to are predominantly locals that are using Australia's generous tax concesssions (negative gearing and capital gains tax concessions) to invest in loss making housing. Current gross rental yields for Australian houses are only around 3.5% (2.5% after costs), meaning that new housing investors are losing around 4.5% before tax on every dollar invested (current discount variable mortgage rates are around 7%). Such an approach to investing only works if house prices appreciate quickly, allowing capital growth to exceed the income loss (clearly unsustainable). According to Australian Tax Office data, there are now 1.7 million residential housing investors in Australia, 67% of whom claim net rental losses (one in every 10 taxpayers!).
There was anecdotal evidence of a surge in foreign buyers (mostly from China), following the Government's March 2009 relaxation of foreign ownership rules - mostly in the cities of Melbourne and Sydney. However, hard data is difficult to find. The Government, in April 2010, reversed this decision, thus, largely returning to the previous foreign ownership system. Thus, it is difficult to know the true impact of foreigners on Australian house prices; although we can safely assume that their purchases would have added to housing demand and put some upward pressure on prices."
Here is the link to the statement: http://seekingalpha.com/user/595019/comment/1060377
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