Tuesday, May 12, 2009

Australia May Face Debt Crisis From Grants to Young Home Buyers

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Sigh. Amazingly, Australia appears to be taking the same path we took (and are repeating). Outside of lending to the worst credit scores with no documentation loans, this all sounds very familiar. Kick the can seems to now be a growing world policy - as always, Americans are trend setters. We are the Kings of Kick the Can.

Does anyone realize at some point interest rates will rise globally? And there are consequences?

Via Bloomberg
  • Australian Prime Minister Kevin Rudd’s bid to ensure his housing market avoids the global property slump may push a generation of buyers into a debt crisis. Grants of as much as A$21,000 ($16,142) to first-time buyers and the lowest interest rates in 49 years have emboldened more than 40,000 young Australians to take out home loans since October, stoking demand for properties that cost less than A$500,000.
  • These buyers may be vulnerable when interest rates begin rising, potentially triggering a jump in foreclosures that will drive down property prices, cut profits at banks and damp household spending, which accounts for half the economy. (where have I heard this sad story before? except remove "half" and replace it with "70%") “We’re mirroring what happened to the U.S. three years ago, when people who shouldn’t have been in the market bought houses,” said Martin North, managing director of Fujitsu Australia, a Sydney-based property-consulting company. “It’s a strategy set for an unfortunate outcome.” (actually you are mirroring what the US is doing NOW - same first time home buyer tax credit as we run out of normal demand, same multi generational rates. I would be curious if your dear country is also allowing 3.5% FHA mortgages, with the closing cost / down payment taken care of by the grant? If so, we're even steven)
  • As Australia slides into its first recession since 1991, Rudd’s payments have been criticized by economists and newspapers for fueling a property boom that may burst once the grants are reduced, possibly as soon as July 1.
  • While the central bank says Australia doesn’t have a subprime crisis because banks have tightened lending standards, recent reports show first-time buyers are driving a residential construction industry that employs 5 percent of the workforce. New home sales have surged 22 percent this year, and building approvals climbed 12 percent in February and March. (green shoots! green shoots! no matter what happens 2, 3, 4 years down the road due to the reason for the green shoots, just celebrate their birth! consequences are for fuddy duddies) Rudd tripled the payments for new homes to A$21,000 and doubled handouts for existing houses to A$14,000 to support the economy.
  • The increases coincided with record interest-rate cuts by Reserve Bank Governor Glenn Stevens, who has reduced the overnight cash rate target by 4.25 percentage points since September to a 49-year low of 3 percent. (3%? 3%!!! Cmon - that's what we have during economic expansions in America. 0%-1% - now we're talking carpet bombing a country with stimulus)
  • The rate cuts have lowered payments on an average A$250,000 mortgage to A$1,470 from A$2,120. The Reserve Bank says that equals an 8 percent tax-free boost to family incomes.
  • “All these things have increased the demand side of property and not the supply side, which always results in increased prices,” said John Lindeman, head of research at property-information company Residex Pty in Sydney.
  • The government grants and interest-rate cuts have prompted first-time buyers, who accounted for a record 27 percent of dwellings financed in February, to borrow more than other prospective home owners. Lending to these consumers surged 6.1 percent between October and February to an average of A$280,600, the Statistics Bureau said. By contrast, home loans to all borrowers fell 1.1 percent to A$253,200.
  • “For many buyers, the grant was critical,” said Fujitsu’s North. “Over 30 percent had loan-to-valuation ratios on their properties of 95 percent or higher.” (normally I'd quiver when I hear that - but again, you have nothing on American programs - shall we send a FHA representative over to your fine country to show you how it's "done right"?) This may eventually leave some new buyers with so-called upside-down loans, as they owe more on their mortgage than the market price of their home.
Scary statistic of the day
  • About 90 percent of Australians hold variable-rate loans that are adjusted when the central bank changes its benchmark rate.
Unintended consequences caused by government's meddling hands (imagine that - same dysfunction as happened in the US)
  • Some prospective home buyers hope the grants will be cut. Ludmila Soboleva, a 40-year-old drugs researcher, has been looking for an apartment in Sydney’s eastern suburbs since November, without success.
  • “Everyone told me this is the best time to buy something but for properties I can afford, it’s a nightmare,” she said. “I wish they would cut this grant so maybe there will be fewer people” trying to buy. (it's hard dealing with central planning economies isn't it?)
Fallout?
  • We’re setting up a whole generation of people for grief,” Lindeman said. “Interest rates will go up, and that’s when they will feel the pain.”
Ah, tossing aside a generation's future is ok, as long as we get re-elected and soften to some degree the recession today. This is Kick the Can policies, and our mantra is spreading throughout the world... like KFC outlets. Except this is KTC, not KFC.

Look ma! Green shoots in Australia's housing industry per government aggregrate data! Buy stocks! Need an explanation or investigate why this is occuring? Nah - that just slows me down from buying more stocks! Boo Yah Mate!

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