‘Property armageddon is coming’
EXPERTS have begun playing out doomsday scenarios for the Australian property market and every single one has house prices falling in the next 12 months - even if the credit crunch doesn't go wrong.
Home prices were expected to drop between 5 per cent if it was business-as-usual and as much as 35 per cent if the country was hit by 'property armageddon' - a nightmarish credit contagion a la the global financial crisis, according to four scenarios crunched by Digital Finance Analytics.
DFA principal Martin North told The Courier-Mail that the results should prove a warning to the Reserve Bank, major banks, non-bank lenders, regulators and borrowers - and give them a chance to consider what needs to be done now to survive.
SEE LIST AT END OF STORY
"I think there are cracks appearing. Firstly royal commission exposed 40 per cent of households shouldn't have got mortgages in the first place. There are 925,000 households in mortgage stress. That's a large number."
Mr North said under a business as usual scenario for Queensland - with rates at record lows for the next 12 months and employment holding, prices were expected to drop between 5 to 10 per cent - and they would take credit growth with them.
"We are already seeing investors with much less interest in property particularly in new residential blocks that were being thrown up all over the place. We're already seeing price slides there. We're seeing sales programs by developers offering all sorts of incentives like 'pay nothing for a long time'. So there's an air of desperation among some developers."
But while unit prices would "slide", he expected Queensland house prices to be more robust "because of relatively strong demand and, of course, first home buyers".
"Under steady as she goes, prices will drop," he said, but it would be even higher in the fourth scenario - property armageddon - when prices would slide between 30 to 35 per cent across Queensland.
"Under this scenario which I call armageddon, everything that can go wrong goes wrong: Instability, North Korea, interest rates go up and down, and the negative feedback loop takes hold. Just as in good times they have a positive feedback loop, if people see prices start to slide then people will try to exit before prices fall further. Property investors lead the way always. The Bank of England said investors were four times as likely as owner-occupiers to try to sell (to cut losses)."
The danger for Queensland, he said, was that it has "high pockets of investors in Brisbane, the Gold Coast, parts of Sunshine Coast".
Both the middle scenarios involved interest rates rising along with mortgage stress - with the third seeing much more aggressive levels of mortgage stress in Queensland in the region of 28 per cent, and the default rate doubling as interest rates rose.
The second scenario, which was his prediction for what would play out here, was that interest rates to mortgage holders would rise "a little", with 23 per cent of mortgage holders in stress, demand tightening, and home prices sliding 10 to 15 per cent over two to three years.
"That's manageable," he said. "The bank's losses would definitely rise because some people wouldn't be able to make repayments, but it's not enough to create instability in the banking system."
But he warned that "if the RBA doesn't get its act together, if they still continue to bet the farm on consumer expenditure and strong credit growth, then we could very easily slip beyond the second scenario".
"House prices are correlated very strongly with credit availability. All the lifts (in home prices) have been because banks have been able to lend. If they do continue the same strategy they have been executing, we could be heading for armageddon."
It may sound dramatic, but Mr North said it was a discussion that needed to happen.
HOW DO WE SAVE OUR LOANS?
Unlike the movies, Bruce Willis is not going to step in for this Armageddon to save our loans, so here are Mr North's suggestions:
1. Stick to a strict loan to income ratio (even if your bank doesn't):
Strict loan to income ratios for lending shouldn't go above 4.5 times income, he said. "That puts the 6, 7, 8 times income in pockets of Sydney into perspective."
2. Just because you can get a loan, doesn't mean you should:
"At the moment a lot of people who can't get a loan in the main banks, go (to the non-bank sector). We don't want to transfer risk from main banking sector to the non-bank sector.
3. Renegotiate with your bank, they are obliged to help you if you are struggling:
"We may need a strategy to help people renegotiate," Mr North said. "Banks need to look at repayment holidays or restructuring loans. It needs to be thought through now before it's a problem."
4. Assume rates will go up:
"You can't assume that the strategies of the last four years will get us through this. The message for regulators, banks, borrowers etc is if you are going to get a mortgage now, do your homework and assume rates will go up. A rise of 3 per cent means it will go back to the long-term average."