Bad bank debts: The data Aussie banks don’t want you to see
‘Down, down! Prices are down!’
Many Aussies may remember that jingle from an advertisement Coles supermarket produced a few years ago.
In a bid to look like the supermarket with the cheapest prices, Coles dusted off 80s English rock band Status Quo, thrust some cardboard guitars in their hands, and tweaked the lyrics to suit its marketing agenda.
That was six years ago now. And that damn jingle still rolls around in my head.
Although I don’t sing it when I see the supermarket.
I start singing ‘Down, down’ whenever I read anything about the Aussie economy…
Desperate sellers turn to Gumtree
The mainstream is struggling to be upbeat these days.
But they are still doing their best to mask what’s really going on.
Unfortunately, it’s getting harder and harder to downplay bad news with glossy headlines.
Take last week, for example.
An article in The Australian Financial Review stated: ‘Desperate off-the-plan buyers of Melbourne apartments have turned to online selling platforms to get out of their contracts, as valuation shortfalls surge amid the current market downturn.’1
This recent revelation comes as finance is drying up for all those off-the-plan apartment purchases made a few years ago.
I’m sure the sudden surge of apartments for sale isn’t helped by the fact that, in the space of only six months, two Sydney apartment buildings have been deemed faulty.
The thing is, this increase in resales by off-the-plan purchasers isn’t new.
Arguably, it’s part of a growing trend.
Earlier in the year, it was noted that some Melbournians were selling their house and land packages on Gumtree.
Due to the 12% fall in house prices since June last year, there is a chance that house and land packages bought on the fringes of Melbourne, won’t match the mortgages attached to them. Meaning, there’s very chance that newer bank valuations will come in at less than the cost of the package bought.2
In March this year, as many as four in every 10 house and land packages offered for sale through these types of sites were most likely purchased by mum-and-dad investors who would probably struggle to get finance with lower house prices.
It seems people would rather resell the land to get back their deposits and break even, rather than be stuck with a block they can no longer afford to build on. 3
This is telling.
People either can’t afford the real estate agent fees of selling a property or there is a sense of urgency in getting out of the agreement.
Either way, when people suddenly ditch the plans for their dream home, you have to ask yourself: What’s going on?
Bought it — but can’t pay for it
One of the true joys of being an analyst these days is watching the rating agencies throw around their opinions.
You see, all the major international rating agencies missed or masked the real issues surrounding the US subprime debt crisis in 2007. As a result, the world witnessed a spectacular stock market crash and a near takedown of the financial system.
Since then, the agencies’ cautious analysis has really stepped up a notch.
After getting the US housing bubble so wrong, it seems the agencies are determined to scrutinise our housing bubble here in Australia.
At the start of June, Standard & Poor’s released a report called ‘Australian Home Loan Arrears’, full of facts and data I’m sure our banks and the Reserve Bank of Australia want us to ignore.
Standard and Poor’s took a fine-tooth comb (or at least it appeared to) to the highly guarded secret of Aussie home loans in arrears.
Turns out, all isn’t as well with the Australian residential mortgage-backed securities (RMBS) sector as invested interests want us to believe.
The report noted that of the total number of people behind on their mortgage payments, 53% are more than 90 days in arrears.4
That is an alarming figure.
Out of all the mortgagors missing payments, more than half of them are three months or more behind.
I’ve long been critical of banks and the arrears data they provide to the public.
Banks do everything they can to internalise this information. A debt handled internally is far more likely to be paid in full — albeit at a slower rate — than if it is shipped off to a debt collector.
However, once a debt approaches the three-month mark without payment, it’s not far from being an official ‘default’ to be sold to a debt collector. Banks generally try to avoid this. Not because of their good nature. Once a loand is sent to a debt collector, the banks gets less for it.
So it’s in the banks’ interest to work with a customer.
And it’s the exact information the banks rarely feel like sharing with the public.
Understand what the bad news tells you
Standard & Poor’s analysis should be taken seriously.
This is as close as us mere mortals can get to hard data on the number of people behind on their home loans.
Most interestingly, however, is that S&P showed that in the last 12 months, there was a rapid jump in the number of loans more than 90 days in arrears.
What’s driving the big jump in people falling behind?
All the things we’ve been saying for the past 12 months.
The slight fall in unemployment compared to the rapid rise in underemployment (where people are working, but less hours than they want to).
The rising underemployment rate means people may have less income than they did when they took out their home loan, making it much harder to meet their debt obligations.
According to S&P, the fact that wage growth is stuck at 2.3% also isn’t helping. And at the end of the day, household indebtedness is significantly higher than it was six years back.
In other words, people are working less and therefore earning less, and the debts they have are much, much bigger.
This all adds up to the crucial ‘serviceability’ of mortgages.
That is, there is less and less money around to pay the mortgage.
And rather than glossing over the truth, the hard data is becoming available for everyone to see.
One rate cut from the RBA isn’t going to suddenly make it easier for people to pay off their mortgages.
And regulatory changes to the loan assessment rate won’t suddenly make existing loans more affordable.
However, this insight from S&P should be taken very seriously.
The fall in house prices is part of the issue, but people’s ability to repay their home loan is the bigger issue.
Want to know where the health of the Aussie economy lies?
Pay attention to non-bank default rates. Look for the underemployment figure over the unemployment rate.
And look out to see just how many mortgagors end up more than three months behind on their payments.
That’s your gauge of how the Aussie economy is fairing.
Until next time,