'Ponzi financing' or 'sound metrics': battle rages over Sydney property outlook
Australian Financial ReviewFeb 24 2016 5:31 PM
Su-Lin Tan
INTEREST ONLY LOANS THE MAIN WORRY
"If the market crashed and burnt now, there will be some who suffer, but that is the case in any market. My only worry is bankers lending on interest only."
Mr Driscoll said there have only been the "odd foreclosures" and he did not anticipate a rise in distressed sales, nor did Ray White chairman Brian White.
But the proponents of a BUBBLE disagreed strongly.
"There has been a phenomenal rise in house prices, land values and borrowing in western Sydney. Something really dodgy is going on there...," said Lindsay David of LF Economics.
CLASSIC PONZI FINANCING
"And the only explanation is that banks are consistently lending more than they previously were is they are lending to less creditworthy people as this housing bubble drags out. This is classic ponzi financing,"
"You won't see any lights on in many houses in new developments in parts of western Sydney in two to three years from now."
Mr David and his colleague, Philip Soos, were the first to submit a report to the federal government's 2015 inquiry into home ownership with a warning of an inflated Australian housing market.
"Property ownership and speculation has been elevated to the status of religion in Australia, compounded by a perverse culture of homeowner entitlement driven by a degenerate taxation system that penalises work and effort while rewarding unearned wealth and income," the report said.
And right in the heart of the problem are the Australian banksand, to a lesser extent, mortgage brokers, Mr David added. The robustness of banks have been over-inflated by regulatory authorities.
"When you go to a broker, they ask to see two payslips, but that is as good as seeing no payslips when asking for an interest only loan 10 times your annual salary," he said.
'GIANT LEHMAN BROTHERS WAITING TO GET SMASHED'
"Our banking system looks like a giant Lehman Brothers just waiting to get smashed. Many of our banks share a similar risk profiles to Lehman Brothers. The only difference is unlike Lehman, our banks hold the cash deposits of most Australians, much of which are tied up in these dodgy loans."
Mr David explained banks take up short term lending and flip between borrowings to service their lending. The ability of borrowers to pay back loans was not as critical as the banks ability to obtain funding.
Low rental yields exacerbate the conditions.
"We have rental yields of less than 2 per cent at the moment... take Strathfield, which has a discount on yields at price multiples greater than South Kensington in London... they are losing money already, and if they are negatively geared, they are incredibly exposed. And let's face it, Strathfield is no South Kensington," Mr David said.
Banking and Finance Consumer Support Association's Denise Brailey agreed a bubble is brewing in western Sydney as well as many parts of the country, including Melbourne, in areas where house and land products are prevalent, and this has been occurring since 2012.
Banks are aiding branch managers and mortgage brokers to provide loans to pensioners and low income families. Many have been offered interest-only loans,which means borrowers can never ever pay back the cost of the home, Ms Brailey said.
Ms Brailey had submitted various proposals to the federal government about Australia's housing bubble based on interviews with more than 2000 borrowers who have slipped in their mortgage repayments.
"A lot of the people who were sold these loans didn't know their mortgages were interest only," she said.
ON THE OTHER SIDE OF THE DEBATE are those who wish to blame the Brokers and Consumer Borrowers:
Western Sydney's housing market may have the hallmarks of a housing bubble, but the property industry has jumped to its defence.
After a tour of western Sydney, economist Jonathan Tepper of US-based Variant Perception and Bronte Capital's John Hempton said the area is in a housing bubble waiting to crash. They support their argument with these graphs.
But Mortgage Choice's chief executive John Flavell was not impressed with these and other allegations of a housing bubble in Australia.
"At the end of the day it comes down to the macro level and at that level, our housing system is based on supply and demand, Australia's population is growing at twice the rate of other western nations," Mr Flavell said.
"For the first time in a long time, supply is coming to meet demand. Sure you can point to pockets where supply and demand gets it wrong but what drives demand is population growth, employment and the costs and availability of credit."
Mr Flavell said Australia's key financial metrics are sound – there are no signs of a significant increase in unemployment, banks have a built-in buffer if interest rates or unemployment rises, and the overall loan to value ratio of the total housing system is a low 24 per cent.
FEAR AND LOATHING
"If you are going to get price falls you will need everyone to dump properties at the same time and there must be an existing oversupply," he said. "You do not get margin calls on home loans and rental vacancies are very low – there are a long list of renters."
"Typically I regard very highly Fairfax media items but in this instance I am disappointed to see an article printed that is long on anecdote, short on data and is essentially the chronicles of a road trip one afternoon by a fund manager and a self proclaimed expert and as insightful as another work of fiction, Hunter S Thompson's Fear and Loathing in Las Vegas."
Despite accusations of brokers and bankers writing up bogus loans, Mr Flavell said bank checks and verification of mortgages in Australia were heavily imposed.
Western Sydney property agents, too, have not seen distressed assets being sold but said the prevalence of interest only loans should ring alarm bells."Are some people overly stretched? Yes, in certain areas but it's not systemic," said Doug Driscoll of western Sydney agency Starr Partners.