Don't mention the housing negative

With house prices falling, repossessions on the rise and more home owners facing negative equity, it's no surprise the RBA is warning lenders to be prudent. Unfortunately the opposite appears to be happening.

For as long as I care to remember, the real estate salesmen's call to action has been: "It’s never been a better time to buy”.

But for the 27 per cent of the first home buyer cohort who followed this advice the year before last, their homes are worth less than what they paid for them, potentially leading to a situation known as negative equity.

Negative equity looks to be on the rise around the country as we settle into our second year of house price falls. According to RP Data, in the December 2011 quarter, 6.4 per cent of homes were valued at less than their purchase price, up from 4.9 per cent in the preceding quarter.

Last month the Reserve Bank head of financial stability, Luci Ellis, briefed the Australian Mortgage Conference on prudent mortgage lending standards. Highlighting why some households default on their mortgages, she told the conference unemployment, especially during a recession, was one cause. "So the really large upswings in mortgage arrears rates have, perhaps not surprisingly, tended to occur at the same time as large increases in unemployment.”

Additionally, falling home prices were cited as another factor for rising arrears, something she believes we need to be "alert” to. "If something bad happens to you and you can no longer afford your repayments, it is better to sell and have a bit left over after discharging the mortgage. If the property value has fallen below the loan balance, though, you are in a much worse situation. You can’t easily sell if you are in trouble or even if you just want to move to a cheaper area or a more appropriate home, or to where the jobs are.”

Ellis stresses Australia does not have the "ingredients” ripe for a US style housing crash, but warns mortgage lenders need to remain prudent. ”It must be hard to resist the disappointed of customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation.”

Earlier this year I wrote on NSW repossessions rising 22.5 per cent in 2011, including a link to a Today Tonight story called "Mansion repossessions".

On Friday night, it was A Current Affair's turn with a story titled "Home Buy Bargain.” According to the story, repossessions have risen sharply around Australia in recent years. The story features Paul Flynn, who specialises in mortgagee properties, saying he’s never seen anything like it. You can read the transcript or watch the video here.

While Ellis is stressing that mortgage lenders need to be prudent, just the opposite is happening as house prices continue to fall and mortgage repossessions rise.

A News Limited article published last week, titled "Home or bust: Default fears as Australian banks return to high-risk loans", reports on RateCity data suggesting almost 70 per cent of mortgage lenders are now writing home loans with deposits as small as 5 per cent. This compares to 50 per cent two years ago. With little to no growth in mortgage lending, banks are resorting to higher LVRs to try to encourage growth. But this comes at a very risky time in our economy.

In "Australian housing market just a jobs crisis away from collapse”, The Australian's David Uren paint the picture of a weak housing market with sales turnover at 16-year lows, listings up 23 per cent over the past year and construction of new homes down 25 per cent since the stimulus ended in June 2010. But, as Uren states, the best leading indicator is mortgage approvals. Most people require a loan to purchase a property. Mortgage approvals have plunged 25 per cent since the first home buyers boost ceased.

Despite a very weak market, Uren writes that falls have been somewhat benign as arrears remain low. "People losing their jobs or running into trouble with their own small business is the main cause of people falling behind on their mortgage. Forced loss of employment has been very low until now.

"Rising unemployment could unleash a wave of distressed sales in the housing market. With the fundamentals of housing supply and demand already so weak, the price movement could be much larger than the present downward drift, with which the Reserve Bank appears comfortable.”

Last month I reported on Roy Morgan’s private unemployment gauge. Historically, both the ABS and Roy Morgan indexes have tracked each other, but in recent months Roy Morgan’s index has taken a turn for the worst. The separation is thought to be attributable to the different measures used to create each index, and there are suggestions the ABS figures are likely to be lagging.

Rising unemployment is consistent with expectations. Falling house prices are hammering consumer confidence through the negative wealth effect, causing consumers to tighten their purse strings. With jobs underpinned by discretionary spending, you don’t have to look to closely at the retail sector to see the consequences unfolding.

Craig Peacock runs a blog called "Who cra$hed the economy?". You can read his posts here.

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