The looming property crunch: Gottliebsen

Successful real estate agents need to keep an ear to the ground – those who do can be an excellent sounding board for what is ahead. Over the weekend I was yarning with some of the First National real estate agents who were meeting in New Zealand.

A large number of them have been enjoying good times. While turnover for most is well below the peak, there is a lot more activity in the home market and those operating in the first home buyer space have been having a ball.

But there is apprehension that the boom is about to pass, which will have significant implications for Australian banks and the home building industry in all states, but especially Victoria, South Australia and Queensland where young families have made full use of the grant.

Indeed, the past year has been remarkable. Not only have first home buyers been handed in the vicinity of $20,000, but banks in many suburbs have been prepared to use the first home buyer grant as a full deposit on a house provided the income of the purchasing family is deemed sufficient. In some cases the more aggressive banks would lend 105% of the price, less the grant.

The avalanche of money into this segment of the market has seen prices of pre-owned and new homes in the lower price brackets often rise by 10% or 20%, depending on which area of Australia is selected. In the pre-owned area, those who were selling often used the funds to upgrade their house, so the effect of the grant has spread to the middle ranking house price brackets.

But now there is danger because the combination of three dramatic events is likely to change the game drastically.

First, the Federal Government is reducing the first home buyer grant in September and again in December. Some state governments have cut back their grants for pre-owned homes.

Second, after spraying money into the market with “no deposit” loans, the banks have suddenly got the jitters and are now demanding deposits in the vicinity of 10%.

Finally, Treasury is expecting unemployment to rise to levels above 8%. That means that some of the people who bought these homes on “no deposit” may find themselves out of a job.

There are a number of factors that contribute to setting the value of houses, but one of the major forces is the level of bank lending. Accordingly, the willingness of banks to lend on an effective “no deposit” basis was a key factor in pushing home prices up.

Now they have withdrawn that facility, they may drive the value of those houses down by the same amount as they rose. That means that tens of thousands of people will effectively have no equity or negative equity in their home.

If these people start losing their jobs and are forced to sell their houses, the situation could get ugly. The simple rule is that it’s never good banking to lend on no deposit – but it’s crazy banking to lend on no deposit and then suddenly stop doing it.

As a precursor to this potential problem, we are seeing more people in some regions now deciding not to sell their home to upgrade. In 12 months, if any bank suddenly reports a rise in home loan defaults, you will be able to link it back to the events of the past month.

This first appeared on Business Spectator.