Finance Market Update - 1 March 19
In this update we talk about how investors who borrowed interest only could be forced to sell which will put further stock on the market in an already falling market, and a clear example of a bank moving the goal posts on people.
Talking points in this update
1. Australia’s subprime moment
The number of “Interest Only” loans coming to the end of their period could put further pressure on property prices as investors are ‘forced’ to sell because they can’t refinance or afford the higher ‘Principal & Interest’ repayments, bringing more stock to market which will put further downward pressure on property prices in an already declining market.
2. ANZ has been moving the goal posts
ANZ admitted they tightened in lending so much that their mortgage book effectively did not grow last year. They have basically admitted to being perpetrators in a credit crunch that has seen property prices decline and starve people of credit to buy homes. Read more below…
There used to be a lot of interest in interest only loans
During the heady days of the property boom the most common type of property buyer was the investor and the most common type of loan was with interest only repayments.
$600 Billion of investor interest only loans were written between 2013 to 2017. 900,000 loans, about 1 in 6, will meet the end of their fixed interest / interest only period as the bulk of these have the “roll-over” data, i.e. when the repayments switch from ‘Interest Only’ to ‘Principal & Interest’ this year and next year, meaning we could see a fundamental (desperate) shift in the amount of property being sold.
Investors own around 55-60% of all apartments in NSW. As mum and dads started to leverage their family home and use SMSF or cash to buy investment properties while overseas investors (namely Chinese and Japanese) bought up a many off-the-plan apartments.
Generally speaking an interest only loan will have the lower repayments for 1-3 or sometimes 5 years, and most of them were done about that long ago.
What we are going to start seeing is those loans that were done in the back half of the property boom come to the end of their interest only period which means the borrowers are either going to have to refinance, pay the higher principal and interest repayments for sell.
Right now, banks are not lending much for investors looking to rollover their interest only loan term. It is possible, but there needs to be considerable equity in that property and strong servicing.
If investors can’t refinance and keep repayments low, they will have to pay the higher principal and interest repayments, which can be >30% higher. This is quite the jump up, and many investors will be unable to make those higher repayments.
So, what does that mean for property prices?
More downward pressure. We will see the default rate and 90-day arrears start to rise. Both of these indicate “mortgage stress” or people unable to meet their financial obligations. The more people that default on their mortgage means either they will have to sell the property, or the bank will foreclose and then sell it.
This means more apartments will try to be sold, which will further depress prices as more stock hits the market, and there are less willing and able buyers given the market is continuing to fall and they can’t get a loan to buy it.
Another unfortunate situation many people could face is becoming “mortgage prisoners”. That is to say as I wrote about in August 2018 that the mortgage, they have is higher than the value of the property or based on the “new” credit criteria (i.e. lenders moving the goal posts) they won’t get a loan for the same size they did a few years ago. This leaves them effectively trapped.
A scary parallel to this is the US in 2006/07 when their “subprime” (people who shouldn’t be able to borrow or borrowed to much) market blew up resulting in the “Global Finance Crisis” (GFC) in 2008. The reason it is a fair comparison is that in those days in America banks, and especially non-bank lenders, were writing loans for people that never should have got them.
If it turns out that our banks and lenders wrote mortgages to people who could afford them, shouldn’t have got them and won’t pay them back, turns out to be a reality, we will have the worst economic collapse this country has ever seen.
ANZ has been moving the goal posts
In our last update we talked about how banks ‘move the goal posts’ i.e. change credit criteria which determines loan approvals, well ANZ is a prime example of this.
ANZ recently released their first quarter update and it stated that in 2018 their mortgage book growth was next to zero – because they have changed their credit criteria so drastically and declined so many loans.
This is quite an admission as it clearly shows they were extremely risk adverse and tight in lending, more than being “overly conservative” as Shayne Elliott the CEO put it.
They have essentially admitted that they tightened lending criteria to such an extent that they have been declining massive amounts of loan applications, particularly from investors.
This is not a trend unique to them.
All of the major banks have been changing approval criteria, making it harder to get loans by scrutinising data (living expenses) and declining applications – all symptoms of a credit crunch.
Proof of this is in the auction clearance rate which has been sitting at around ~50% since November last year, which is not uncommon given the time of year, but is well below the peak of 80% in 2016.
The question now is – have we seen the worst of it?
If you believe the ANZ CEO that they want to lend more to investors and are relaxing certain credit criteria, then we could see a lift in lending.
If you don’t believe anything will change then it is likely this current lending style will continue and could actually get worse if/when we head into a recession and as property prices continue to slide to a fall of 20% from their peak.