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Wake up Australia, we have a debt problem

By Redom Syed

Promoted by Confidence Finance.

Ten years ago, the biggest financial crisis in decades rocked the global economy. At its roots, the GFC begun with American borrowers getting loans they couldn’t afford & having their repayments increase with‘adjustable rate mortgages’.

Fast forward ten years, we are replaying the start of their story. Thousands of Aussie borrowers are facing a repayment increase on their mortgages in the next 18-24 months. Most have no idea. Many won’t be able to afford it.

Australia, we have a debt problem.

This article puts a spotlight on the origins of our debt problem and explains how we got here. For background, in this earlier article, we explained how Australian interest only loan contracts work and how these loans will have a repayment increases in coming years. 

How did Australia get into a debt problem? 

1. Interest rate reductions & and a failure in lending market oversight (2011-2015)

The origins of our debt problem begin with interest rate reductions following the end of the mining boom.  Naturally, the cash rate reduction incentivised Australian’s to take on more debt.

To safeguard against poor lending practices, APRA reliedon lenders to stress test whether borrowers could afford repayments if interest rates rose by at least 2%.  This stress testing would ensure that borrowers could afford future repayment increases.

However, lenders ignored this key pillar of lending regulation. They only applied this buffer to new debt, not to debt that customers held with other banks.  This loophole effectively allowed some borrowers to avoid ‘stress testing’ when obtaining a loan. 

2. Big ramp up in lending & interest only lending (2012-2016)

With rates at record lows, and no one adequately supervising the banks, Australia’s household debt continued to grow between 2012-2015.

House prices begun rising & interest only loans had become increasingly popular.  These are loans that borrowers don’t have to pay down for the first 5 years of their loan term. Thereafter, these loans have their repayments increase as they move back to principle and interest terms.  On a $500,000 loan size, the repayment increase after 5 years is roughly $900 per month.

3. A crackdown on lending policies & Interest Only lending (2015 &2017)

Eventually, regulators started to get concerned about the rapid growth in residential mortgages&looked at how lenders were applying their lending assessments. 

APRA soon realised lenders only stress tested some debts, assumed borrowers had unrealistically low living expenses, had no restrictions on interest only lending& didn’t advise borrowers that repayments increased in future years when interest only periods expire.

What followed was a massive reduction in borrowing capacities and restrictions on interest only loans as lenders applied more robust buffers in their affordability calculations.  Borrowers would also be required to meet the new lending rules to have their interest only terms extended. 

4. Interest only periods expire & the repayment crunch begins (2018-2020)

The glut of interest only lending that was approved under poor lending practices has a potential cost.  Borrowers that got those loans will be facing higher repayments when their IO periods expire.  Many will not pass the new higher lending standards.  Furthermore, over 25% of households have less than 1 months savings available to them to absorb repayment increases.

What options do borrowers have?

Borrowers on interest only loans that mature will fall into one of the following four categories, from best to worst;

  • Make the additional repayments when the loan converts to principle and interest repayments; borrowers can simply adjust their situation and make the additional repayments. Many borrowers have already begun preparing for changes and done this already.
  • Refinance their loan with a mainstream lender and extend their interest only term; this is only available to borrowers who can pass current eligibility criteria. As a guide, for every $1million in debt borrowers have, they will need an additional $40k in household income to support the same level of debt today vs 3 years ago.  With little to no wage growth, many may no longer qualify.
  • Refinance their loan with a non-bank lender; for those who are desperate to maintain their interest only period but fail servicing with mainstream lenders, they can go to the non-bank lenders to secure a new IO period for another 5 years. These lenders have less restrictive lending criteria, but interest rates are usually 0.50-1% higher.
  • Sell; when all else fails, borrowers can sell their properties/investments. This is unlikely to lead to large scale losses for lenders or borrowers, as house prices have grown rapidly and data shows Aussie’s are on relatively low LVRs.

What should the regulators do about it?

Firstly, the regulators need to understand the size of the problem.This month the RBA and the IMF both dressed over Australia’s debt, looking at current financial stress indicators to play down any issues.  Financial stability experts know this analysis is weak, as measures of financial stress lagwell behind origination problems.  Furthermore, many borrowers are completely unaware of their repayments rising (hence aren’t stressing about them!).

What the RBA, APRA & ASIC need to be doing is working out:

  • When borrowers interest only terms expire
  • Which of the four baskets above do these borrowers fall into

Only then can the size of the problem be properly quantified. 

If this analysis reveals a big enough problem, regulators will need to devise a way to soften the landing.  Here is a draft five-point plan to manage the market impacts:

  • Allow investment interest only loans to be extended without reassessing borrowers to new serviceability criteria. This pushes the problem down the road and spreads the timing of interest only expiries.
  • Allow lenders to re-issue 30-year loan term for borrowers whose interest only terms expire. This will help lower the repayment crunchas repayments will be over 30 years rather than 25.
  • Promote or incentivise non-banks to continue to provide solutions. Competitive pressure can help alleviate price gouging from smaller lenders.
  • Allow lenders case by case extensions to interest only periods where required.
  • As a last resort, consider further reductions in the cash rate or delays to upward movements to help manage the broader risk to the economy.

How likely is a ‘soft landing’?

Australian regulators have been facing a delicate balancing act managing the economy post mining boom. At this point in the economic cycle, the regulators job is to orchestrate a soft landing.

While the start of our story is like America in 07, the way this story unfolds will likely be far less dramatic.

High household debt is a threat to the economy and requires robust monitoring and management. To date, regulators have failed to appropriately acknowledge the size of the current debt problem. 

Nonetheless, they have the tools in their locker & a proven track-record of success to suggest that Australia’s debt problem will end with a soft landing.

 

About the author:

Redom Syed is the Founder of Confidence Finance. Redom has been recognized by MPA magazine the Youngest Top 100 Broker’s in Australia after settling over $150 million in lending. Prior to becoming a finance broker, Redom worked as a Macro-Economist at Federal Treasury.  Here he became a published author on the design of the International Financial System and spent 3 years working on financial market regulation.

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  ["title"]=>
  string(51) "Boost for investors as app sets up off-site bidding"
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  string(55) "boost-for-investors-as-new-app-sets-up-off-site-bidding"
  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1196 (52) {
  ["id"]=>
  string(5) "18159"
  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
  ["alias"]=>
  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
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  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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