The Proof Showing Banks Are Worried about Mortgage Debt

What’s one of the signs that a bank has overleveraged itself…and doesn’t want you to know about it?

They make sudden changes and reassure you it’s about falling in line with ‘regulations’.

The Teachers Mutual Bank made sudden changes last week to their home lending practices. Effective immediately, the bank will now only allow a 50% principal and interest set-up for all home loans. Existing interest-only loans have seen rates jacked up 0.4% to boot.

As The Australian reported, the Teachers Mutual Bank claimed ‘….the change is aimed at managing interest-only lending growth in line with requirements from bank regulator APRA.

Except, of course, for new builds by owner-occupiers.

It’s not a bubble when it’s a high-quality development

Sudden policy changes from banks alarm me.

I’ve worked for a lender. For a while, I was privy to the delinquency data. That is, all the people who are behind on their loans by a certain amount of days. People 30 or 60 days in arrears don’t always terrify lenders. However, once this stretches out to 90 days, well, that’s when your loan becomes ‘delinquent’.

All banks have a tolerable default figure. And it’s monitored daily. But it remains internal. The general population doesn’t get to know about it.

If you trawl through a bank’s end of financial year data, you won’t find the total loan delinquency rate either. What you will find is the percentage change in the number of bad loans throughout the year. But you never get to know what the actual delinquent amount is.

Which is why sudden moves like the one from the Teachers Mutual Bank are telling. It lets you know the bank needs to build a buffer between the debt on their books and customers’ cash on deposits. And they need to do it quickly.

They appear to appease you by saying they are falling into line with regulators. But they’re not. Especially when they point out that these rules don’t apply to new builds by owner-occupiers.

You read that right. These new lending requirements from the Techers Mutual Bank apply to established properties. Properties which likely have historical price figures.

However, brand new buildings — most likely on the city fringes — don’t have to follow the same rules.

Think of all those new suburbs currently under construction. New houses being built without basic amenities nearby. And, of course, let’s not forget that none of these newly-constructed buildings have price histories.

Yet the bank is happy to continue offering interest-only loans to this pocket of the market…

Hmmm.

That strikes me as fascinating because there may be more to those off-the-plan purchases than you realise.

I discovered this recently in conversation with my mortgage-broking friend.

We debated the merits of the property market; he mentioned to me that developers over the years have offered him incentives to refer clients to him.

Apparently, if one of these referrals signed on to build a brand new establishment, a developer would pay anywhere from $5,000–20,000 as a referral fee.

This acquaintance said that this was a large conflict of interest to him, and wouldn’t refer anyone for something like this, adding: ‘If this is how much they are willing to pay for a simple referral, just how much padding is there in these new homes and apartments people are paying for?

On guard!

Talking property is as Australian as cold meat pies are to an AFL match at the MCG.

The mainstream are still commenting on last week’s data from CoreLogic data which suggested a property price ‘correction’ lay ahead for Australia.

In the week since, my news feed was full of headlines like ‘What comes after the housing boom?’

John McGrath, the mogul behind the McGrath real estate business, has weighed in on the endless ‘is it or isn’t a bubble’ saga.

McGrath came out and said that after 30 years in the business, the ‘doom and gloom’ predictions have never eventuated. In a statement, McGrath said:

I’d actually encourage you to welcome a slowdown in growth. After a long period of price rises — about 75 per cent in Sydney alone, we need a period of consolidation that will put a floor under these new price levels and provide stable ground for home values to rise strongly again in the next boom.

I can’t argue with that logic. A small fall in house prices will test the market to find support.

However, it was McGrath’s next statement that got me (emphasis mine):

Of course, no home owner likes to see prices going down. But it’s important to remember that if we do see some price reductions, they’ll be small and short term. History tells us that good quality properties double in value every decade but growth is never in a straight line. More often than not, we have a few decades of strong growth, a few years of little growth and round in circles we go.

It’s entirely possible that ‘good quality’ properties double in price every decade. But where are these good quality properties? Ones near places of employment, in good school zones, with solid infrastructure and public transport nearby, I’ll bet. That doesn’t say much about the houses being built on the city fringes with yet-to-be-determined levels of infrastructure and interest-only loans.

But here’s some food for thought: What if the property boom isn’t over? And what if you could pinpoint the exact date at which the property market will peak? It isn’t…and you can. It’s called the ‘Grand Cycle’. Whether you own a home or not, this information is critical to understanding where we are as a nation, and where we’re going.

Kind regards,

Shae Russell,
For Markets & Money


Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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