I had the chance to discuss the current state of the mortgage industry with Founder and CEO of Hashching Mandeep Sodhi.
Our conversation covered the recent underwriting tightening, mortgage prisoners, how brokers are helping borrowers navigate the new rules, and the rise of digital channels.
Thanks Martin and Manni for this very insightful podcast.
Any small business owner reliant on discretionary spending needs to sit down and listen very intently on what Manni has said about the extra (and overdue) level of scrutiny now being applied to would-be borrower spending habits.
So not only, as High-Rise Harry likes to point out, will mortgage holders cut back on all forms of discretionary spending to keep up mortgage payments in the face of flat wages growth, higher living costs and rising mortgage rates, but anyone wishing to borrow will need to demonstrate similar restraint for at least 6 months prior to being sold a loan!
Wise from a prudent borrowing stance, but a marked departure from the conditions many small businesses have come to consider “normal”.
Then again, the “new normal” has been in place in Brisbane for quite a while. The stresses of these factors on “consumers” in a market where house prices are “only” gently rising has become more and more patent over the last 12 months – restaurant and other small business closures and these shopfronts remaining vacant for extended periods. This pain is visible in our 3 major Westfields – which are amongst the largest 10 or 11 shopping centres in Australia – where shops are closing and remaining vacant for prolonged periods. Actually in my local Westfield Carindale there are currently 15 or more store spaces vacant and a number have remained vacant for over 6 months (when I struggle to remember prior to this year a single space remaining vacant for longer than required to conduct a fitout) and several businesses have closed having opened only 3 or 4 months earlier! I expect these conditions to quickly manifest and get worse in Sydney and Melbourne now that house prices are falling there.
And as you have shown so conclusively, Martin, these mortgage (and now perhaps pre-mortgage) stress trends are only just beginning to become entrenched, and your scenario analysis (with which I agree) suggests that the road to put the Australian household sector back on a surer footing through prudent use of credit will involve significant pain for some along the way.
The irony I find in all of this comes from my recent experience at an investor conference where a well-known Australian investment manager gave a very good run down of the national and international macro backdrop, highlighting over-indebtedness of our households and very high house prices, but then proceeded to plug a new product where they aimed to achieve around 2 pps greater return than term deposits from RMBS warehousing. A frivolous remark was made to “The Big Short” but I was thinking immediately of the much more gritty (and more pertinent in this case) film “Margin Call”.
Anyhow, the point is this. They are selling this product to mainly late-stage superannuants and retirees. And I believe many other similar RMBS-related products are being marketed to this group for a few extra percentage points of return – and these products are originated out of mortgages sold by the non traditional lenders whose looser standards, as Manni explained, are allowing borrowers perhaps 50% greater mortgage values than what banks are lending with their now higher scrutiny.
It would seem to me that, and perhaps it is intentional, much of the risk is being shifted from the major banks’ loan book to elsewhere. But where will that risk reside?
I would assume that the risk, and any ultimate losses, will fall to the buyers of these RMBS products. And it is these people who have been, in many ways, the prime beneficiaries of all previous attempts to protect the housing bubble from collapsing – most notably during the GFC – and thus they have benefitted greatly by the multi-decade period of strongly appreciating house prices.
Optimists might suggest this group will be double winners – they get to have the value of their (possibly most important) asset protected while earning a few percentage points extra return over bank term deposits.
However, if things turn disorderly and if they are not vigilant, these same people may suffer the double whammy of seeing their property assets decline in value while they also experience significant losses on these other products in which they invested for just a few extra percentage points over secure term deposits!
But then again, who else in this over-indebted country has the balance sheet to absorb the losses? Even the Commonwealth Government will likely suffer credit downgrades, possibly even in the less than Armageddon scenarios you modelled, Martin…