This move by the banks confirms bubble

[DanielG]

Hi All,

I read this article and it left me cold

http://www.debtdeflation.com/blogs/2010/12/23/loan-standards-drop-to-keep-the-bubble-afloat/

St George now have this product on the market. So let me get this straight, we have "no" bubble, yet banks are resorting to these types of "schemes" in order to ensure house prices keep rising. This is the kind of crap that led to the US bubble and collapse, and I now seriously question the viability of the market.

I don't think anyone here can deny that these sorts of products are created with one intention only, and that is to ensnare more people into debt. Why? What are the banks hiding? Why are they so desperate to lower their standards?

Prices in Australia are higher than what I would like, but I wasn't sure if we were in a bubble, but this kind of moves just confirms it to me.

I would like to know what everyone else' reaction to this is.

 

[Ridin-High]

Hi All,

I read this article and it left me cold

http://www.debtdeflation.com/blogs/2010/12/23/loan-standards-drop-to-keep-the-bubble-afloat/

St George now have this product on the market. So let me get this straight, we have "no" bubble, yet banks are resorting to these types of "schemes" in order to ensure house prices keep rising. This is the kind of crap that led to the US bubble and collapse, and I now seriously question the viability of the market.

I don't think anyone here can deny that these sorts of products are created with one intention only, and that is to ensnare more people into debt. Why? What are the banks hiding? Why are they so desperate to lower their standards?

Prices in Australia are higher than what I would like, but I wasn't sure if we were in a bubble, but this kind of moves just confirms it to me.

I would like to know what everyone else' reaction to this is.

My reaction.

Whats the difference between meeting rental commitments for a few yrs and servicing a loan for a few yrs?

Their is more incentive for a home owner to service a loan because if they default they can lose their house, stamp duty they paid, legals, LMI etc etc.

these are just natural moves to increase profitability as any business would.

I wouldn't look at it as proping up a dieing property market

 

[DanielG]

I respect your opinion Riding, but you said it yourself...Increase their profitability, but at what expense?

These kind of lowering of LVR's to these levels is dangerous, especially in an environment of rising interest expectations.

The fact that the banks admit that debt issuance is slowing because people cant afford to save for a deposit high enough to ensure "safety" in the banking system, the banks therefore lower that standard, and this is where the danger lies.

 

[Beebop]

It makes a great deal of sense. More buyers can actually result in decreased prices.

 

[Beebop]

I respect your opinion Riding, but you said it yourself...Increase their profitability, but at what expense?

These kind of lowering of LVR's to these levels is dangerous, especially in an environment of rising interest expectations.

The fact that the banks admit that debt issuance is slowing because people cant afford to save for a deposit high enough to ensure "safety" in the banking system, the banks therefore lower that standard, and this is where the danger lies.

If there are thousands of people demanding affordable properties they will be built.

If there are a few cashed up investors buying a handfull of properties as investments construction will lag.

The ability to pay $500 per week in rent consistently, is the same as paying $500 p.w in mortgage or saving that while you live at home.

 

[Player]

...............Whats the difference between meeting rental commitments for a few yrs and servicing a loan for a few yrs?

The difference goes a little deeper RH. Tenants know it is cheaper to rent where you wish to live than to actually buy there. Add the fact that tenants do not pay council rates, building insurance, utilities supply charges and all the other affiliated expenses and repairs that we as landlords fork out for them.

On that basis, utilising rental payments as a form of saving is somewhat ambitious as they would have needed somewhere to live in the first instance.

Their is more incentive for a home owner to service a loan because if they default they can lose their house, stamp duty they paid, legals, LMI etc etc.

these are just natural moves to increase profitability as any business would.

I wouldn't look at it as proping up a dieing property market

I am not a doom and gloomer, however having lived thru a few cycles, whether it is seen as propping up a market or just adding a little more helium to the balloon, personally I don't consider it to be fiscally responsible.

Whilst we do not have the non recourse facilities to personal mortgages that afflict many US states, this smells of desperation to bring back high 90's LVR's and sugar coating them with a different criterion of (alleged) saving. Doesn't augur well for interest rates, except for the lenders.....increase the supply of money and the demand and ensuing effect on house prices and then the cost of those funds will rise to curb the prices that the demand creates.

IMO, it may finish badly. Thanks for sharing that article Daniel.

 

[DanielG]

If there are thousands of people demanding affordable properties they will be built.

If there are a few cashed up investors buying a handfull of properties as investments construction will lag.

The ability to pay $500 per week in rent consistently, is the same as paying $500 p.w in mortgage or saving that while you live at home.

And if there are 3 interest rate rises in 3 months, effectively raising the cost of ownership from $500 p.w to $550 p.w?

Remember with rent its based on market prices, and even then there is a 2 month period to jack up prices. Interest increases are sudden and higher.

 

[recruit2]

The two speed economy has to be partly to blame here.

We have people in these mining boom towns earning a packet, but living in the middle of nowhere, putting upward pressure on inflation. Then we have the normal people in the other half of the economy trying to afford a home while rates are going up and up and hence so are rents. But they aren't earning the same dollars as those in the boom areas.

I know some people in a strong mining town who are trying to pick the right time to get out as the uncertainty has hit them. I also know some people in a Sydney/metro area who over committed themselves to the hilt and are also looking to downgrade during 2011 with the expectant further interest rate rises.

Overall I am seeing quite a lot of people either downgrading, exiting or just sitting on the side lines (I'm doing the latter).

I can't see a huge collapse, but I can certainly see 2011 being the year of correction/contraction. The bottom end of the market will probably continue to do reasonably ok because there is always demand in that portion of the market, people need to live somewhere and even people downgrading will be buying these cheaper houses, plus with this above mentioned relaxed lending criteria, that further strengthens the bottom end, even if only temporary, not sure..

I'm just waiting, watching and observing at this stage.

 

[DanielG]

The two speed economy has to be partly to blame here.

We have people in these mining boom towns earning a packet, but living in the middle of nowhere, putting upward pressure on inflation. Then we have the normal people in the other half of the economy trying to afford a home while rates are going up and up and hence so are rents. But they aren't earning the same dollars as those in the boom areas.

I know some people in a strong mining town who are trying to pick the right time to get out as the uncertainty has hit them. I also know some people in a Sydney/metro area who over committed themselves to the hilt and are also looking to downgrade during 2011 with the expectant further interest rate rises.

Overall I am seeing quite a lot of people either downgrading, exiting or just sitting on the side lines (I'm doing the latter).

I can't see a huge collapse, but I can certainly see 2011 being the year of correction/contraction. The bottom end of the market will probably continue to do reasonably ok because there is always demand in that portion of the market, people need to live somewhere and even people downgrading will be buying these cheaper houses, plus with this above mentioned relaxed lending criteria, that further strengthens the bottom end, even if only temporary, not sure..

I'm just waiting, watching and observing at this stage.

I agree, however the point of this post was to highlight the desperate moves by banks to entice more customers at the expense of keeping the system safe.

 

[vbplease]

This press release implies that you could approach St George with $20,000 in savings, be given a $1 million loan, and have it recorded as a 95% LVR loan (since St George probably has the same maximum published LVR as Westpac of 95%) where $20,000 was your actual deposit and the effective LVR was actually 98%.

Daniel, would you have a link to the actual press release? Because Keen's quote above is not making sense to me... taking rental payments as proof of savings is changing the serviceability calc not the LVR - the two are seperate. Or am I missing something?

 

[buzzlightyear]

I agree, however the point of this post was to highlight the desperate moves by banks to entice more customers at the expense of keeping the system safe.

The banks policies have been doing the opposite for the past 2-3 years, ie pushing away marginal and more risky borrowers thus making the system safer. You only need to have followed the commentary by MB's on SS to have noticed that.

However tweaks and changes to serviceability requirements are not publicised. If they were they would have dwarfed this one instance (assuming it goes ahead).

Its just a bit of 'colour and movement'.

 

[bluestorm]

Daniel, would you have a link to the actual press release? Because Keen's quote above is not making sense to me... taking rental payments as proof of savings is changing the serviceability calc not the LVR - the two are seperate. Or am I missing something?

vbplease. This was also cover a bit in another thread. The original media release was in the Adelaide Now.

Banks to use rental history as evidence of savings for First Home buyers
http://www.somersoft.com/forums/showthread.php?t=67732

 

[alexlee]

Credit quality deteriorates when the banks no longer care about serviceability. So when lo-doc and no-doc loans are available at similar rates to full doc loans, and at higher LVRs (>80%), or banks start becoming flexible with their serviceability calcs, then I'd be worried. Rent is real money, so if you can pay $500 in rent, you can also pay $500 to the mortgage.

As it is, as Buzz said, I don't see lending being loose. Credit deterioration is always at the fringes. That's not loosening. Back in 2006, credit was loose.

A bubble needs both unsustainable increases in demand, accompanied by unsustainable supply (in that you run out of buyers). One indication is people getting loans they cannot repay unless they can refinance in the near future. I don't see this happening.

 

[marg4000]

The allowance of rent as proof of ability to pay may assist some people to qualify for loans who may otherwise miss out. Whether this is a good thing for them or not is entirely up to them.

My son had very little savings but was able to borrow 100% to buy his first PPOR when he relocated (to Melbourne) for a job on a relatively high income. He was always good at paying his bills but rather hopeless at saving (boys and their toys).

Just on 6 years later he controls $2M of property on an LVR of just under 70%.
Marg

 

[alexlee]

The key is no so much what the banks count as serviceability, but whether what they're counting is actually real.

Lending on, say, the full value of your car is not really 'real', since you can't sell it for full value.

Lending on treating rent as proof of ability to pay is real, since rent is real money that people pay out.

This is still lending based on real ability to pay, as opposed to 'take my word for it' no-docs.

Is it 'safer' to not treat rent as serviceability? Sure, but it's not a big shift. Used to be that young people found it very hard to get loans. Is that 'safer' for the banks? Probably, but that doesn't mean lending to young people makes the system riskier.

To me, this is not a big move and doesn't make the system much riskier.

 

[Rolf Latham]

simply a gen savings replacement

I cant see what the storm in a teacup is ?


ta
rolf

 

[DanielG]

Hey all, my concern (which I have stated but no one has responded to) is that interest rates can be hiked immediately, whereas rents are slower to filter through.

1. Rents need 2 months before they can be implemented.
2. Rents are based on market prices, jack too high and tenants can move.
3. Interest rates are IMMEDIATE and SUDDEN.

Imagine someone who pays $300 per week, and this accounts for 50% of his NET income. Then 3 sudden hikes in 3 months, now his rent is $330. That makes it $90 a month more, just like that.

This is where is gets scary, because most people are in debt, the reason they have this policy is because ppl have very low savings or none.

We are in a market of rising interest rates, even if inflation does curb, the international debt market are raising their costs, which all Australian banks are getting their money from (theres not enough Aussie savings to cover the loans) and so rising interest rates are unavoidable, regardless of what the RBA wants to do.

I may be wrong, we'll see how things progress from here. Im sure well here more next year.

 

[BV]

I read this article and it left me cold

You've voluntarily decided to read Steve's cr..p blog
so its your own fault.

Hi All,
St George now have this product on the market. I don't think anyone here can deny that these sorts of products are created with one intention only, and that is to ensnare more people into debt. Why? .

Its not a new product.
Ok they've relaxed one of their own rules because they have too much money and want to profit from it.
So what's strange about making money?
Nothing so stop reading cr..p and believing it

 

[pieman]

Just remember he's always wrong

 

[BV]

Just remember he's always wrong

The mistake he and other gloomers make is that they ignore government and RBA intervention and ofcourse people's behaviour which will change depending on market forces.

So in other words Steve is trying to predict the unpredictable and that's the reason he's always wrong.