In This Video:00:32 Property bubble is elsewhere in the world 00:50 Property bubble in the US 03:46 What happened in Australia during global financial crisis? Good day everybody Daimien here from Integrity Property Education. If you are looking for some property investment strategies, advice, information then you come to the right place. Today’s blog video is about the “Property Bubble”. Is there a property bubble in Australia and is it going to pop? The first thing that we need to understand is that there is a property bubble elsewhere in the world and yes they have popped. The main example is in the US. We did see a similar effect in the UK, because their banking sectors are closely tied together.
What happened in the US?What happened in the US was quite interesting. The government over there set up 2 banks and started lending money to the people who the other bank won’t lend money to. So these 2 banks were called Freddie Mac and Fannie Mae. They lent money to the people that could normally get loans. That was interesting with good intention, of course, they had wanted every American to be able to realize their American dreams of having their own homes, and so they started lending them money. This time when the idea came up, the property market was very strong and the economy was very strong, so they started lending money to these people.
What did that do to the property market?What did that do with the property market was it reduced the number of renters and increased the number of buyers. The rents basically started going down and didn’t move at all and the buyers went through the roof. That in term, put house prices up. All of these people were able to buy houses that they couldn’t buy before and the property market was going up, but then there were started housing problem. Inflation started to take off because there were so many people buying houses and so much money flying around the economy. As the inflation started to go up, the American Reserve Bank had to put interest rates up to slow down the economy. When this happened, it was the beginning of the end. Why is that? Because these people that they lent money to, have these loans called “Non-recourse Loans”. Non-recourse loans – basically the only security on the property was the property itself or the only security on the loan was the property itself. If they couldn’t afford the mortgage anymore, all they had to do was leave the keys on the door, ring the bank and say “Sorry, I’m Out!” This happened as interest rates went up, all of these people started foreclosing on their mortgages. We went from a situation where we had oversupply of buyers pushing prices up, to under supply of buyers and mortgages foreclose everywhere and it put the mortgage market in the free fall. All of these foreclose flying in the market and house prices tumbling down quite dramatically. Behind all that, there was also this thing called the “Subprime Process”. Subprime Process – these mortgages that were linked on the non-recourse were referred to a subprime mortgages. Why is that? Because they are non-recourse, subprime meaning, less than prime. They were not very good securities but they were selling them and trying these mortgages as a security behind the scenes in a complex arrangement of the investment scams. What then happened, when the foreclosure went down and had to claim all these, the security became worthless because house prices dropped below the value of the mortgages and then we had a big crisis that spread across the world and became the global financial crisis.
During all of these, what happened in Australia?Well, what happened in Australia is NOTHING! That’s what happened in Australia, because in Australia we didn’t lend money to people who couldn’t afford to pay it back, we only lent money to people who had good incomes, accessible surface income, and were able to master deposits. When the rest of the world started going down in this global financial crisis, Australia’s economy held pretty strong. In particular our housing market, we did get attacked in other sectors during the second, third, fourth and fifth but our market held strong. So if you think there is a property bubble in Australia and if you think the market is going to collapse, ask yourself this question, why didn’t it collapse during the GFC? If ever there is going to be a great test of an Australian property market, if would’ve been during the GFC right? So we survived! Why is that so? Like what I’ve said, we don’t lend money to people who can’t afford to pay it back. While the other arguments that people put out about the Australian “property bubble” theory is they say that the Australian average house price has never been a greater multiple of the Australian average income. That is factually true. So what they are saying is that the multiple of how many years income in the pipe to buy a house has never been so great. As I’ve said it is factually true. But what those people don’t understand is that the lending practices have changed. Once upon a time you could only borrow money for 15 years and you had to pay it all back in that time and their principal and interest loan. If you have to pay the same amount of money back in 15 years as supposed to 30 years, then you will have a larger principal amount to pay back in order to get it pay down. This term is going to consume your surplus income that the bank assesses you have, and they will not go to lend anywhere near or as much money. So, all of the buyers in the market with these only 15 year loans were restricted to a smaller multiple of their average income. Does that make sense? So when there’s only 15 years loan, people could only borrow a smaller multiple of their income. Therefore, the market is cut as such. But now we have 30 year loans, you’ve got 30 years to pay the same amount of money back; therefore your disposable income can buy much and much more money to borrow for hats, because you got longer years to pay. You got twice as long to pay it back, therefore the capacity to buy has gone up and the competition in the market has occurred. Prices are now at a point relative to wage base on how much the people can borrow and then on top of all that, we’ve got 2 other things. We’ve got:
- Interest-Only Loans – basically you don’t have to pay the money back. You just got to service the interest.
- Reverse Mortgages – these where people capitalizing mortgage re-payment by just adding it on top of the loan.