The UBS survey: What does it mean for Australia?

The UBS survey: What does it mean for Australia?

The RBA left the official cash rate at 1.50% for the 13th consecutive month, with RBA governor Philip Lowe saying this week:

“Slow growth in real wages and high levels of household debt are likely to constrain growth in household spending.”

Hot on the heels of the RBA decision, UBS has followed up its’ controversial ‘Liar Loans’ survey with another eye opening account of the Australian property market, stating up to a third of borrowers with interest-only loans may not realise they have them.

I am always wary of fear inducing surveys, especially when such a small sample is taken however in this instance many analysts believe UBS are spot on. Those of you who remember the 2008 GFC (9 years ago it smacked us in the face) will understand it all kicked off with sub-prime loans in the US- particularly low introductory interest only loans.

So what can we take from the UBS survey if we take into account it is indicative of the wider market?

  • 33% of borrowers are not fully informed as to their responsibilities for the loan they have taken out- whether this is from the broker or the lender. This could be due to inexperience, a lack of training or simply greed.
  • Despite sub-prime house, interest only, lending collapsing world markets, the product in Australia is alive and kicking.
  • There is a seeming  lack of financial literacy in Australia
  • The implications of high household debt levels amid tighter lending conditions and a market that’s showing signs of cooling.

A recent survey from S&P found 36 per cent of Australians were not financially literate, while ME Bank’s survey found 42 per cent did not understand compound interest and 38 per cent had no understanding of an IO mortgage. Predicted flatter house prices will have a high impact on borrowing capacity along with potential decline in interest only facilities

The stories in the mortgage market are too numerous to ignore. So many times we hear of brokers declining to proceed with a loan due to servicing or unsuitability only for the client to go to another broker and get it approved. The market is saturated with brokers and sadly if one says no invariably another will manipulate the system to get an approval. It reminds me of a line in “The Big Short” when Steve Carrell’s character is meeting with a CDO manager, with the manager saying “I assume no responsibility”. The banks are already making noises for brokers to assume more responsibility.

On the back of UBS insinuating there could be $500 billion of ‘liar loans’ in Australia it is probably fair to say clients are aware of the system too; so brokers and lenders don’t carry all the blame.

The Australian Mortgage market has USA 2008 written all over it – the difference is that this time we have warning and an opportunity to correct it, before it is too late. The issue with 2008 was that all the subprime interest only loans couldn’t afford the higher rates when refinance time came. Defaults rose exponentially, jobs were lost and house prices plummeted. APRA is trying to arrest the issues but it can’t do a thing about loans already written.

If UBS is right then Australia’s perceived property bubble will pop. Let’s hope they are wrong.

Now we know of potential problems, we need to look for solutions.

Mortgage holders need to budget for P & I payments.

Brokers need to up their vigilance when writing loans. The last GFC saw lenders suing valuers for incorrect valuations. It would open a can of worms but we need to ensure there is no reason for lenders to sue brokers.

Lenders are being monitored by APRA but need to continue their path of loan restrictions.

Developers don’t like building in bubbles or heading into a recession. It is only a matter of time before the next recession hits – that is how market cycles work. So timing is everything: either build before price corrections or be prepared to land bank till the next upswing. Look into all funding options to see what is right for you.

It is rare that someone can pick when recessions happen or bubbles pop, but those who have, look to past cycles and past warning signs. It is fair to say consumer sentiment is a good indicator of cycles and at present that sentiment, whilst cautious, is still high.