On The Brink !

A UBS report warns that $500 billion in home mortgage loans are based on incorrect loan application information.  What this is saying is that applicants have overstated their assets and income and most do not meet the standards expected for loan repayments.

The banks are supposed to be tightening credit to achieve better loan security, but evidence points in the opposite direction.  Of those who have recently received a mortgage loan from a bank, two percent said they were encouraged to be inaccurate in their application.

It seems that the banks have too much money sitting in their vaults where it is delivering no return and Australian industry is not expanding and seeking development loans to soak up that cash.  As a result, the banks have a very strong incentive to be aggressive in the home loan mortgage field because it is underpinned by rapid and long term price expansion.

At the moment, a customer with a mortgage who falls behind with payments can put the house back on the market - and expect to make a profit, but that sounds like playing that old game of " musical chairs ".   If we encounter another recession that person trying to sell a house is going to be like the player when the music stops -  stuck without a seat to sit on.

Realists know that the situation can change overnight.  This house price balloon is a mirage that can pop at the first sign of trouble. Many remember the experience back in 2008 when home prices dropped sharply and buyers became an extinct species.  Many found that they owed more on their mortgage than the home could now be expected to sell on a depressed market - and the banks were quick to foreclose when repayments went into arrears.

All this is exacerbated by a trend where parents are making loans so that their children have the necessary deposit to get a mortgage and get a foot on the home purchase ladder.   In many cases this is a gift rather than a loan, and the parents see is as simply bringing forward a natural inheritance issue.  In some cases, it compromises their own retirement income.  Usually that money from a parent goes towards the bare minimum deposit necessary to finance a bank loan.

What is frightening is the prospect of a significant number of home loan repayments being forced into deficit and starting a panic.  Wages have been static for some time, and the doubling of electricity prices has added pressure to many household budgets.  Mortgage repayments are taking a greater percentage of family income and in some instances that is now nearing fifty percent - and that is not sustainable.

Right now, the biggest threat to the Australian economy seems to be headlines that spook the infallible contention that hose prices will go ever upwards.   It is inevitable that interest rates must eventually rise and even a small rise will tip some borrowers over the edge.  That dividing line between concern and hysteria can develop very quickly.

Unfortunately, we seem to heave learned little from the experience of 2008.