This article is from the Australian Property Journal archive
The signs are here again, as borrowers are feeling the pressure from servicing highly geared properties and mortgages they committed to during the property boom, according to Hall Chadwick’s Sydney partner Geoff McDonald.
McDonald, a well known insolvency practitioner, said he has recently seen a significant increase in people coming to him for advice regarding problems with mortgages.
"There are going to be some sad stories involving highly geared properties and mortgages that can not be met.
"It is not unusual, especially in cities like Sydney Melbourne and the Gold Coast, for people to have $400,000 mortgages. The pressure from servicing such mortgages can be intense – households are stretched to the limit.
‘And once payments are overdue, a penalty interest rate starts to kick in. The penalty rate increase can be several percent, which amounts to a huge difference, and makes the situation even worse for the borrower,” he said.
McDonald said that’s not all.
"Because money is so tight, people don’t have the money to spend to spend on maintenance, and it doesn’t take too long to show properties start to get run down and this in turn further depresses the price of the property.
“If the bank has to repossess a house and sell it with vacant possession, the property will fall into more decay, reducing its value even further. It very quickly becomes a downward spiral, with everyone losing our badly.
"The last time we saw this happen was in the 1980s and early 1990s," he said.
McDonald said not only are individual borrowers going to be hurt, but there may well be damage to lenders such as the banks and home loan originators as well.
"Back then, the banks got caught badly – Westpac lost in the order of $1 billion. I wonder if we are going to see billion dollar bad debt provisions again in the 2006/2007 year?," he said.
An additional concern is that property values have dropped in some areas, leading to an actual shortfall of equity for some borrowers.
"Also, I wonder when the law suits are going to start against valuers for over pricing properties in deals done in 2003-2004. I know the banks are looking at the issue already,”
McDonald questions whether lenders have made adequate provisions for the possibilities of such a downturn.
"I am seeing people who are admitting that there is a 10% to 20% shortfall to the banks, and their bank hasn’t started to take action yet,” he added.
McDonald’s warnings are supported by the Australian Prudential Regulation Authority, which has voiced concern about high risk lending in the housing market, after the NSW Supreme Court announced a 60% increase in repossession orders made against NSW homeowners last year – 4,873 such orders were made to the Court in 2005 compared to 3,061 in 2004.
Recent data from mortgage broking group AFG, indicates that the average housing loan to valuation ratio, at 71.5% in January 2006, has increased by some 5 points compared to the same time last year.
The recent Australian Bureau of Statistics (ABS) report shows that housing building approvals in December 2005 were 9% lower than in December 2004.
"These sorts of statistics back up what I am seeing in my office every week.
"There really is a groundswell of people in difficulty with their mortgages. I fear that the repercussions may be more severe and eventually more widespread than most people are willing to consider – and that includes lending institutions,” McDonald concluded.
By Kathryn O’Meara
