Lending to "asset rich income poor" investors a sign of a property bubble
Australian Financial Review May 2 2016 8:07 PM
Su-Lin Tan
The record ratio of house prices to incomes and banks targeting "asset rich and income poor" investors are two signs the Australian housing market is poised for a fall, housing economics group LF Economics says.
LF Economics' co-founders Lindsay David and Philip Soos join others warning of a Big Short housing bubble in Australia.
Banks have consistently lent to borrowers who would never be able to repay "unless they flip their house for a profit", Mr David said.
Using loan application forms collected by financial services consumer activist, Denise Brailey, Mr David said these investors - "asset-rich and income-poor" (ARIP) investors - with income as low as $23,000 have managed to obtain $400,000 loans to finance their property purchases, often negatively geared.
Many of these loans were obtained with basic bank applications forms which were altered to make borrowers look more creditworthy then they actually were, Mr David explained.
The group has also made a submission to the the penalties for white collar crime senate inquiry which is due to report in July. The submission has not been made public as the committee contemplates its 150 page document, the inquiry office has said.
Ms Brailey has also made a submission to the inquiry. (#23)
Reviewing mortgage application forms she has been collecting over 15 years, Ms Brailey said lenders have been "systematically targeting "ARIP" older investors" who owned their own home.
"They were not told these "mortgages" were interest-only loans. They were not informed the loans would implode within five years and they would become homeless," she said.
But loans also known as "low doc" or "no doc" loans have declined since the global financial crisis, and now only form 0.4 per cent of new mortgages issued, according to the latest update by the Australian Prudential Regulation Authority.
Additionally, even low interest rates would not stop house prices from crashing, as seen in regional towns across Australia, Mr David said.
"You don't need interest rates to move higher to see house prices fall," he said.
"As very long-term housing price indexes have shown in Australia and elsewhere, prices move in cyclical patterns regardless of what interest rates are doing."
"Lower interest rates since the peak in 1990 have merely encouraged Australian households to maximise leverage to speculate on residential property. Otherwise, speculators don't take into account what the prevailing interest rates are, they only care about potential capital gains."
"We now know that when banks walk away from lending to a particular housing market (such as mining towns) house prices crash."