With the Reserve bank meeting this week to look at interest rates, Leading Property Analyst and Developer Chris Anderson says we need look no further than places like Redland, Logan and Ipswich to see the plight young home buyers face.
The Reserve Bank has decided to hold rates and Mr Anderson warns that any future rate increases would cause chaos for many.
The problems don’t just start with cost of living or rate rises, it’s based largely on the fact that many people have been forced to pay too much for their ‘new homes’.
As the large, national, corporate developers have moved into areas, they have overpaid for land and that has had the net effect of forcing the price of spec or newly built homes beyond the realms of true value.
The young buyers then secure loans which, frankly, should not be granted on those properties because the re-sale value is just not in them.
We’re seeing situation in many of the areas where, traditionally, local developers would buy land, and bank it until the market was mature or ready for release -so the market dictated and controlled.
Those local developers who knew and watched the market and as such demand meant that prices stayed in line with values.
A common scenario now is for the corporate developer to pay big numbers for the land, too much usually, in order to leap frog traditional local land bankers, in turn they then have to develop fast and sell even faster.
Therefore, supply is short and monopolized and price subsequently rise on finished stock. That means higher retail prices, especially on finished homes and aggressive marketing.
The market gets driven by the corporate developer rather than the market driving development.
The result is that many people after factoring in bank charges, mortgage insurance fees, govt charges and debt costs during construction, end up with homes that on completion, cannot realize anywhere near their purchase price or even the values of the mortgage holders’ borrowings, so there is no escape route and absolutely no buffer or wriggle room.
The net effect is that new home buyers are now paying 15% more than equivalent near new home buyers.
This means that if they sell, or are forced to with rate rises or pressure, their initial deposits or capital will disappear.
In plain language, developers keep their profits, banks loans are repaid, Brokers drink their upfront commissions and the home owner goes back to the bottom of the property ladder and may never get another chance.
Figures reveal more than 144,000 homeowners in Queensland are in mortgage stress and about one in five are close to default.
That’s an indictment on the values who should form the cornerstone for lending. It means that even the slightest movement in interest rates would see many moves towards defaulting with no hope of having an asset backing to save them.
Mr Anderson says the whole landscape of development and housing, along with the finance sector has changed dramatically in the last 10 years and legislative governance and controls have not adapted fast enough to protect the home owners.
On top of that throw in the critically important management of superannuation being honed in on by the same banks, brokers and “advisors” and we have some tears ahead. The end users and home owners who rely so heavily on the authorities to protect them are being horribly let down by industry watchdogs sleeping on the job.
Digital Finance Analytics figures back this up. They show even a slight rate rise would see more than 150,000 Queensland homeowners fall into stress and 10,191 would be close to being forced to default or sell up.
According to the analysis a 2 per cent rise would put more than 12,200 people at risk of losing their homes.
It is time regulators moved at two levels- valuations and the structure of loans as part of an overhaul of retail lending procedures.
I advocate the introduction of much of what was recommended in the Sedgewick report earlier this year.
Those changes proposed to the Finance sector would in effect deliver a rationale back to the market which would both stabilize and see the level of ‘advice’ necessary return to real estate and most importantly to mortgage sales.
At present the volume based incentives and ‘soft dollar’ payments paid to finance brokers simply encourages them to push hard for loans that won’t and don’t stack up and banks urgently need to cease the practice of increasing the incentives payable to brokers when engaging in sales campaigns.”
It is however pleasing to see Banks now adopting an ‘end to end’ approach to the governance of mortgage brokers.
It a start and should bring about some long overdue changes. Banks need also to front up and take a look at some of their own practices in terms of sustainability.
Brokers are pushing clients to lenders with big up-front payments of commission with less emphasis on the longer term traditional trailer commissions, because they know these homeowners won’t be in these loans long term.
In effect, the homeowner’s interests take a back seat when brokers promote one loan or another.
For far too long we have had very poor sales based people masquerading as finance experts, we’ve seen poor valuations and way, way too many ex-record bar sales people or milk men buy a franchise or a licence and hang a piece of paper on an office wall that then entitles them to masquerade as investment specialists. It’s a nonsense, and is costing future generations dearly.
Let’s face it, they, when proposing mortgages, they are entrusted with the financial future of families.
Time for a re-think and some tangible action.