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Australian house prices in 2010 – part 2

I don’t know if many people read or realised the significance of this low key article “Westpac tightens mortgage criteria“ in the Business Age two weeks ago. Basically what it said was that Westpac has lowered its loan-to-valuation ratios (LVR) for new full-documentation mortgage customers from 92% to 87%, including two per cent for lenders’ mortgage insurance. Did this statement ring any alarm bells for you when you read it? To be honest, it did not for me either until I read Steve Keen’s explanation on what this means to a potential home buyer, using simple “Deposit Maths”. If you have a deposit of $50,000 and the bank is prepared to lend you 95%, you can buy a property worth $1 million. If the bank will only lend you 90%, you can now only buy a property worth $500,000, half of what you could have bought before. If the bank will only lend you 85%, you will only be able to buy a property worth $333,000. A small percentage decrease in LVR requirements can have a dramatic impact on what properties buyers are able to bid for. More details on this can be found in this article “Tighter credit rules to halve home loans“.

According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property’s value. With Westpac’s new LVR requirements, these buyers will not be able to buy the same properties that they could have bought in 2009. The pool of qualified buyers for properties at today’s prices will shrink and this will put pressure on housing prices. For now, Westpac is the only bank to have tightened their lending criteria, so buyers can still get the loans they need from other financial institutions but I doubt this will continue for much longer. All our banks get their wholesale funding from the same offshore money markets and the cost of these funds have been rising. Westpac has been doing the prudent thing by raising their interest rates and tightening their lending accordingly. These are hugely unpopular moves and it probably will cost them a sizable loss in market share in the short term but I believe they will be better positioned to weather any downturn in the property market than their competitors.

Other headwinds facing the property market in 2010 include rising interest rates and the reduction of the First Home Owner Grant from $21,000 to just $7000 from 1 Jan 2010. We can already feel the impact of this as new home sales fell 4.6% in December 2009. Property sales will be further slowed if unemployment starts to edge up again. The slump in job advertisements in January 2010 does not give me much confidence in the fragile economic recovery continuing in 2010. The government can increase the number of skilled migrants coming to Australia to maintain a high demand for houses but unless they can get jobs, they will not be able to get the loans needed to buy houses. We may have a housing shortage and plenty of buyer demand but as I mentioned in my Nov 23 post, people cannot buy houses without credit and credit is tightening. Just over a year ago, 100% or even 105% loans were relatively common but over the past 12 months, the LVR has fallen steadily to 95%, then to 90%, and now to 85% (when you exclude the 2% mortgage insurance) for new borrowers approaching Westpac. It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortage of homes at the time.

Many local property experts are predicting another bonanza year for property investors in 2010 but given all the above considerations, I cannot share their optimism. Unless the government comes up with new incentives, I think house prices will fall in 2010. I am still very happy with our decision to sell our investment properties in the popular first homebuyer locations last year.

4 Feb 2010 Update: Just came across this article “First-home buyers struggle as interest rates rise” about the findings of Fujitsu Consulting’s survey of 26,000 mortgagees. They found 45% of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”. No wonder the RBA did not dare to raise interest rates again on Tuesday!

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