There’s a lot riding on the accuracy of the increasingly rosy predictions for home values – not the least of which is that it is a massive bet on the financial fortunes of the major banks.
Some better than expected property price numbers for September showing a more gentle fall in values on a national basis has unleashed the property bulls who are scaling back downside predictions and ramping up next year’s price recovery rates.
The assumption that property prices will dip a little more this year and start to bounce back next year has built into it an assumption that those people deferring interest payments will get back on a payment schedule when the moratorium is lifted; it assumes that renters can start paying landlords again; and it also assumes borrowers on JobKeeper or JobSeeker will resume/find employment.
It suggests the credit quality of bank mortgages, the prospect of loan impairments and their revenue will also be an issue that will fade to black.
It assumes these property value headwinds have ostensibly gone. They haven’t.
The big negatives according to AMP economist Shane Oliver are: “high unemployment and distressed sales as government income and bank support measures wind down; falling rents and high vacancy rates weighing on investors; an 80,000 per annum or so reduction in underlying dwelling demand flowing from the hit to immigration.”
The value of the deferred loans peaked in June but by the end of August still accounted for 9 per cent of loans. These risks remain regardless of the more gentle declines in property prices to date.
But it is easy to understand why property experts and economists have been backpedaling on predictions of massive falls in house prices they made only a few months back.
The fact is the sky didn’t fall in (or should I say hasn’t fallen in) and capital city dwelling prices are down a relatively modest 2.8 per cent since their April peak. Indeed capital city prices outside Sydney and Melbourne are ticking up.
The trouble with this analysis is that it doesn’t reflect the existence of the normal free market forces that feed into the supply and demand equation – which ultimately determines price.
The stimulus provided by the government and the relaxation around loan repayments by the banks kicked the problem down the road and has created an artificial market.
A market that is arguably impossible to read.
The government is hoping that a plethora of measures to support the housing market will be enough to ensure that there is no cliff at the end of that road.
It is reversing the controversial responsible lending laws – allowing banks more freedom to lend to the marginal borrower. Meanwhile it is expected to extend the Home Builder and First Home Deposit schemes and inject plenty of additional stimulus into the economy to boost jobs when it delivers the budget next week.
Banks are hoping that extending the period of interest payment deferrals and moving some borrowers onto interest only payments will also buy customers enough time to get back on their feet.
But there remains a huge question mark over how many deferred interest borrowers will be able to reinstate interest payments of any kind. A report by UBS analysts this week raised concerns about the credit quality of those customers looking to extend their deferrals.
UBS has previously delved into the credit risks attached to what it has termed ‘liar loans’ through an annual mortgage survey it conducts. These liar loans refer to borrowers that were not completely honest with their loan applications.
UBS bank analyst Jonathan Mott suggests that banks need to undertake a high level of due diligence before extending the period of interest deferral.
The survey found that 21 per cent of borrowers that had previously sought deferrals were intending to request an extension. However, UBS found the credit quality of customers intending to ask their bank to extend their deferral was concerning.
Of these customers the survey found 40 per cent had overstated their income in their mortgage application (and by 21 per cent on average), 15 per cent had understated other debts, 67 per cent were on JobKeeper and 25 per cent on JobSeeker.
This raises the prospect of an increased likelihood these borrowers may not be able to service loans and could need to sell their homes.
It is hard to imagine that this won’t increase the supply of homes and apartments coming onto the market – and thus put downward pressure on prices in six months.
Source: Thanks smh.com