Cracks in Australia’s housing market are getting bigger

Bloomberg

Here’s a fun experiment you can try at home: Open the online mortgage calculators of Wells Fargo, Halifax, part of the U.K.’s largest mortgage lender Lloyds Banking Group, and Commonwealth Bank of Australia, and tap in the median income in each country; $53,657, 25,844 pounds and A$59,571 respectively. Which bank looks most generous?
If you’ve followed international housing surveys such as Demographia’s — which reckons four of the world’s 10 least-affordable markets are in Australia and New Zealand — you won’t be surprised by the answer.
The Commonwealth Bank’s calculator promises to lend borrowers up to 5.5 times their income, compared with 4.75 from Halifax and a “conservative” estimate as low as 3.5 from Wells Fargo.
That’s a remarkable difference. It’s possible that it’s down to Australian banks’ superior underwriting skills, or the effects of over-regulation in the U.S. and U.K. in the wake of the 2008 financial crisis. But it’s worth at least entertaining the possibility that banks prepared to lend borrowers more than half their post-tax income may be storing up trouble for a future when interest rates aren’t at record lows .
Even putting that to one side, Australia’s housing market is looking more shaky than it has in a while. Median house prices have fallen 6 percent from a year earlier in state capital cities and new home sales dropped 5.3 percent in February from a year earlier, the sharpest decline since July 2014.
The value of Macquarie Group’s home loans that were more than 90 days overdue almost doubled in the December quarter to A$476 million — a still-modest 1.3 percent of its A$36.6 billion residential mortgage book, but a share that’s heading rapidly in the wrong direction. In the largest cities of Sydney and Melbourne, rental yields are at record lows, Moody’s wrote.
That will cause the performance of home loans to deteriorate throughout this year and next as both the income and capital gain from property investments gets squeezed, the analysts said.
Betting against Australia’s homes and the banks that lend to them has for a long time been a great way to lose money.
The property market is so embedded in the country’s, and region’s, political and economic life that something has almost always come along to save it —whether the A$4.6 billion the government spent on mortgage-backed securities after the 2008 financial crisis, the A$2 billion to A$5 billion a year it spends covering the losses of investors whose rental income falls.