Mortgage market a 'house of cards'
THE Australian mortgage market has "ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7trillion "house of cards”, a new report warns.
The Big Rort, by LF Economics founder Lindsay David, argues Australian banks' use of "combined loan to value ratio” - less common in other countries - makes it easy for investors to accumulate "multiple properties in a relatively short period of time despite high house prices relative to income”.
"The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.
"This approach allows lenders to report the cross-collateral security of one property, which is then used as collateral against the total loan size to purchase another property.
"This approach substitutes as a cash deposit. This has exacerbated risks in the housing market as little to no cash deposits are used.”
The report describes the system as a "classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.
"Profitability is therefore predicated upon ever-rising housing prices,” the report says. "When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages.”
LF Economics argues that while international money markets have until now provided "remarkably affordable funding” to Australian banks, there is a growing risk the wholesale lending community will walk away from the Australian banking system.
"(Many) international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7trillion 'piss in a fancy bottle scam',” the report says.
The report largely sheets the blame home to the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
"ASIC and APRA have failed to protect borrowers from predatory and illegal lending practices,” it says.
"Although ASIC has no official 'duty of care', APRA does, and will have some serious questions to answer in relation to systemic criminality within the mortgage market committed by the financial institutions they regulate. The evidence strongly suggests the regulators have done nothing to combat white-collar criminality in the mortgage market.”
Australia now has the second highest level of household debt in the world, with a debt-to-income ratio of 190 per cent, and at least 60 per cent of banks' loan books are related to housing.
Experts have warned that one in four mortgaged households are currently in stress, and modelling suggests if interest rates rose by just 0.5 per cent, that would jump to one in three households.
A spokesman for ASIC said it did not accept the criticism.
APRA has been contacted for comment.