05 February 2011

It’s different here

If I had a dollar for every time someone said to me: “It’s different here; we didn’t have the dodgy lending practices that they had in America”, I reckon I would have a good $12 by now.

So what do you consider to be a conservative requirement for a deposit for a potential home owner?  10 per cent? 20 per cent?

Well, just last year, we had lenders who were asking for no deposit – not one cent – and on top of that, they handed out an extra 5 per cent spending money to fill the new house with furniture!!

“Next month, non-bank lender Mortgage House will offer a home loan equivalent to 105 per cent of the property's value - the most generous deal since the global financial crisis kicked in three years ago.  The company also offers a 99 per cent loan-to-value ratio loan, which it launched last month, and says applications have been flooding in.”

While house prices are rising, this kind of reckless lending goes largely unnoticed. If the homeowner can no longer pay the mortgage, they simply sell their house for a profit and pay back their loan – everyone’s happy.

It’s when house prices start going down, and homeowners owe more than they own, that we’ll discover it’s not different here after all.

Comments and queries welcome.



  1. You'll probably find;
    1. Loans usually over 80%-90% require mortgage insurance
    2. loans over 80% also require future equity either in propert, shares or other assets.
    So in reality the risks are not as high as you leed to believe.
    Also you will also find there are a lot of legitimate people who have very high incomes but no savings for one reason or another. And they are more than able to pay the exorbitant interest rates quite confortably...........while they still have a job, with the nearly all time low unemployment rates.

  2. So, in conclusion.....just because a small minority of lenders are unleashing the reins slightly, doesn't mean we are in for the largest property crash Aussies have ever seen.

  3. P.s. You should have a box above to check......... slightly disagree, disagree, strongly disagree and your out of you frigen mind disagree like there's no tomorrow!
    Cause I'm sure most people would check the latter box!

    Keep the reports coming.............
    I like!

  4. Hi Anonymous,

    Thanks for the comments.

    Re 1 - yes, loans over 80% require mortgage insurance. But that protects the bank, not the borrower, so I'm not sure what your point is.

    Re 2 - I don't think you are right about loans over 80% requiring other equity. Can you provide any evidence?

    You say a small minority of lenders are unleashing the reins. But I would say that EVERY lender has unleashed the reins. Check out the CBA website for example. It says:

    "The maximum we will lend you is 95% of the valuation amount. We also add the Lenders Mortgage Insurance or a Low Deposit Premium to your loan (up to a maximum of 97%), so it doesn’t cost you anything upfront."

    This easing of lending requirements is a very good sign that we are in for a property crash - I'll explain why in a future post.

    Finally, you say that “they are more than able to pay the exorbitant interest rates quite comfortably” but then rebut your own point by saying “while they still have a job with the nearly all time low unemployment rates” – because we all know that unemployment cannot stay at all-time lows forever.

    Haha - thanks for the feedback - I will consider those changes to the reaction check box.

  5. By the way all, to avoid confusion, it might be better to enter your name or even a nickname under 'Name/URL', rather than using 'Anonymous'.

  6. I thought mortgage insurance just covered the different between the deposit and 20%.
    The other 80% is assumed to be safe.

  7. Excellent article Andy! Most people who have criticized you are just plain terrified because they know that you're right and they stand to lose big time.
    All my money is in the bank earning great interest so I have nothing to lose and ALL TO GAIN!

  8. I'm a housing bear, but I have to disagree with DaVinci that AUD in the bank isn't at risk. You might escape the blast radius that is AUS residential real estate, but you can't escape the radiation.

    All of the people who think that they will cherry pick bargains are as delusional as the bulls. If you're lucky enough to still have a job it will still be difficult to get credit. That's why it will be so hard to find a bottom.

  9. We all scoffed at American banks for providing 'Ninja Loans' but in reality we here in Australia are doing exactly that.

    No Income - We use POTENTIAL rental income in assessing loans here in Australia.

    No Job - As above RENTAL Income doesnt even have to be established for us to use the potential income to lend against.

    No Asset - We leverage highly against existing property and the more people that leverage against thier own properties the more it reflects in sales and the more it drives up valuations.

    Valuations are based on sales prices Not Value!

    So with that are Australian Banks providing Ninja loans? I think yes.

  10. Spot on Andy!

    Aussie sheeple have been brainwashed their entire lives into thinking house prices only go up. Regardless of how hard they might find this to believe initially, the equity markets and the
    real estate markets are unconsciously determined by consumer sentiment, the unseen driving force that powers the economy. Interest rates..... irrelevant. Demand and supply..... irrelevant. Population growth..... irrelevant. Housing shortage..... no such thing! Here in Australia, despite the 'location location' prattle from vested interest spruikers, real estate is nothing but a trap for the unwary.

    Check out this blog for more info.....

    Australia House Price Crash

    Cheers, Dank.

  11. Obviously it IS different here, as three years into the GFC, there's been no property crash. All the doomsayers should now admit they were dead wrong, but they won't, they just keep on making open-ended predictions eg it WILL happen. But that's nonsense. I predict I will win Lotto...OK, it hasn't happened yet, but it WILL happen...won't it? Or at some point do I admit that it won't?

  12. Its obvious now that 'Anonymous' works for a real estate company... its ok Centrelink will always be there.

    Wait, that was a bit harsh sorry, but then hey so is the rubbish they spill to people.

    If its different explain how?


  13. It's only different from the perspective of different circumstances - Rudd and his idiots pumping (wasting) taxpayer money into an already inflated property sector to keep it 'inflated' and the fact that China is 'growing'.

    When these different circumstance work their way though then Australia will experience a correction. It is inevitable. You have to be deluded or a complete fool to believe that everything continues to go up.

    Sure, statistically I could win the Lottery but aside from that I am absolutely sure from an odds perspective the economy will experience a decline at some point in the very near future.

  14. @Nick: Oh, spare me the tired line that if anyone disagrees about a property crash, they must be a real estate agent. Explain how it is different? Simple; no crash. Explain instead, where is the crash? Answer; no crash, viz, as plain as the nose on your face how it is different. I am simply an astute investor who has an unencumbered residential property and several unencumbered rental properties. I have done ALL of this without using leech real estate agents either to buy and sell or for property management. By all means rent if you want to, but just remember that someone has to own your rental property. If there were no landlords, what would you do? I do appreciate my tenants, I look after them very well and keep rent increases down to an absolute minimum, as I am grateful for them paying off my mortgages for me and giving me a comfortable retirement.

  15. Anonymous @ 2.51pm,

    I agree that you don’t have to be a real-estate agent to believe there will be no crash. In fact, the vast majority of Australian believe this - which is exactly how the bubble became so large.

    But the fact that the bubble hasn’t yet burst isn’t proof that it won’t or that we’re different. Do you acknowledge that every boom has at least some risk of a bust?

    Out of interest, if you were new to property investing, would you be leveraging up to buy at this time?

  16. @Andy: That many people believe something is no reason to believe it true; logical fallacy #1. "..the fact that the bubble hasn’t yet burst isn’t proof that it won’t or that we’re different." is also illogical. The fact we haven't detected leprecauns is not proof they don't exist, but until they are detected, the onus is on the believer, not the skeptic. There are other alternatives that the doomsayers simply neglect to consider. There is no reason that property prices could not remain flat for an extended period, allowing income multiples to catch up; a crash is not necessarily the only outcome. I do not recommend leveraging up at any point. I bought my first house when I was 18 and at uni studying for my economics degree, and worked two jobs. I do regret that home ownership is out of the reach of many/most young people, and I note with disdain the attacks on baby-boomers such as myself, that somehow we are to blame. Just be patient Gen X and Gen Y. We baby boomers will die off eventually and you'll inherit what we've all worked so hard for. In the meantime, work hard, share accommodation or rent, and find other investment vehicles you can afford that don't require a huge mortgage.

  17. Anonymous @ 4:35pm, re logical fallacy #1 – you might have misread, I was saying the majority of Australian believe house prices will NOT crash, and of course, I don’t believe they are right.

    I also agree the onus is on those proving there will be a crash – hence this blog!

    Not sure about other doomsayers, but I haven’t neglected to consider the plateau theory – but I’ve ruled it out – please check out my post - “Will property prices plateau?”

    I certainly do not attack baby-boomers for doing well - we're all just doing the best we can in the system and circumstances we find ourselves in. I also appreciated your attitude towards Gen X and Gen Y, and agree with your advise to them.

    I'd still be interested to know if you acknowledge that there is any risk of a crash of say 40% of more? If not, what makes us different?

  18. @Andy: Is there a chance of a 40% crash? Yes, but it's extremely remote, at least in the short to medium term. Best to look at what features our market has that the other crashed markets (USA, Spain, Portugal, Ireland etc) do not have, or vice versa. We have strong employment without a reliance on the construction industry. We have well capitalised and highly profitable banks. We have recourse mortgage lending. We have low govt debt, even after Rudd giving away in 18 mths what Costello paid off over 11 years. We have a energy/resource based economy, and the world is hungry for energy. We have had strong immigration, with relatively wealthy immigrants, particularly Malaysians and Singaporeans bringing in $ to support property prices.I was debating these aspects with others 4 years ago, pointing out why we would not crash while other economies would, and it seems the history supports my assertions. Of course if property prices DID crash by 40%, the rental yields would go through the roof, and people like me would go on a buying spree, which would self-correct the market over time. I see the property market stabilising for the next 5-10 years, with only modest growth if any at all. That will allow income multiples to catch up which will ultimately improve affordability. A crash is NOT an inevitability, and those who think it is need to think it through a little more. Buy some Rio and BHP stock with your savings, re-invest the dividends and save for your home deposit (minimum 20%). Yes it will take a while, but you'll be ahead of the property market.

  19. "A crash is NOT an inevitability, and those who think it is need to think it through a little more."

    This would then be a *first* amongst speculative bubbles. Manias have their own dynamics and although the inevitable can be delayed for a time, as has been the case here, the end will come nevertheless. A feature of bubbles, particularly housing bubbles, is everyone thinks that theirs is special and different.

    You can have all those so-called *strong* indicators and yet still run out of "greater fools". Interest rates are the key, once these start heading higher, that's it.

  20. @Annonymous, you seem well versed in quoting your net worth and how hard you worked to get to where you did. That there is commendable. Giving advice whilst your own assumptions on the market are wrong though is slightly demeaning.

    I digress.

    You say that rental yields would go through the roof. That may be true for some without a mortgage though generally a key indicator of a crash will be interest rates. Then for those that have mortgages this will be terrible as interest will far exceed rental return.

    Heck and whos to say the Govt wont abolish negative gearing in the future? Singapore just have. then your competing with forgone cost, yes you may get a rental return on properties but what other sectors of the market could you be benefitting from? eg shares.

    Shares have out performed housing since well, ever. Investing in shares also provides the companies with funds to invest in further projects. This hoarding psyche of Australians that just pummel funds into bricks and mortar is not only having an effect on affordability but also the oppurtunity for companies to invest this money into new jobs.

    I say bring on the crash so Australians may look at investing thier funds WISELY.

  21. @Nick: I've not quoted my net worth, and my advice you'd be wise to take. My 'assumptions' on the market have proven to be correct. Those such as Steve Keen have proven to be incorrect by simple observation and history. One is not proven correct by being wrong and then stating that at some undetermined point in the future one will be proven right and vindicated. Had Steve held on to his inner-city property instead of selling, his net worth today would be higher. There has been no property crash in Australia. This is a fact. Statements to the contrary are obviously incorrect and are framed now as predictions. But after more than three years of predictions, at what point does one admit one is wrong? Predictions must have 'sunset provisions' else they are useless.

  22. @Anonymous: Its funny to come onto a site that is about the housing market crash, to see someone spruik of net worth and how he has 'been' right in the 'past'. You wouldnt be that Mr Harvey Norman chap would we?

    The facts are there will be a correction, in my line of work I would know (hows that for one making himself sound important!)

    Yet you simply look to the past and quote in Dismay at this Steve chaps desire to sell of his property. "Steve held on to his inner-city property instead of selling, his net worth today would be higher"
    That is correct but would his net worth be higher next year? no.

    The past is fantastic you got that right, but the problem with knowing the past is that its there for everyone to see. Hindsight is great like that.

    Banks are too reliant on borrowing from overseas, over 95% of funds are sourced OS. The high dollar and the current market place have helped keep a lid on rates. When the US economy kicks into gear there will be alot of pressure on where these magical funds to buy Aussie houses will come from. If the US picks up or China slows down prepare for an interest rate correction regardless of what the RBA do. Remember they only dictate 5% of the borrowings that is available to lenders.

    "and my advice you'd be wise to take" your right invest in shares where gains can be had. invest in shares because they are more liquid. heck you may have $2 million of properties against your book but when the hit comes I wonder how hard it will be for you to off-load these properties to get any capital back? if at all

  23. @Nick: Again, I've not stated my net worth, nor will I. What I *have* done is told you what I've done and what *has* happened. My line of work tells me that your prediction is no more than that, a prediction, and one that has yet to happen, if indeed it will happen at all. My strategy has worked. Why would I want to unload any of my properties, crash or no crash? I have no debt. I have spent a career warning people *against* too much debt, and showing them how to mitigate it. Frankly, your attitude is one of 'dog in the manger' and sour grapes. It's been nice talking to you, I'm done with you now.

  24. Hi Andy, excellent blog. You're title "It's Different Here" reminded me of this blog.....

    It's Different Here!

    It's a great term, and succinctly sums up the delusion suffered by Australians as they think this sort of property market is 'normal'.

    All the best.

  25. Thanks for the feedback Charles.


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