Australia 'at the Front' of Growing Subprime Mortgage Market

Australia 'at the Front' of Growing Subprime Mortgage Market

They triggered an economic meltdown in the United States and sparked the global financial crisis, but subprime mortgages are staging a revival in Australia.

Ratings agency Moody's says Australian lenders have doled out $3 billion worth of the non-conforming home loans over the last 18 months.

Prime mortgages are those that typically go to people with good credit scores, secure jobs and existing, well-serviced loans.

Moody's analyst Robert Baldi says non-conforming, or subprime, borrowers tend to have patchier personal financial histories.

"We're looking at things like prior bankruptcies or prior defaults in their credit history past," he explained.

"If the borrower is a non-resident, for example, or it's a jumbo loan, these would all fall outside of the lenders' mortgage insurance criteria and would classify the loan as non-conforming."

Essentially, subprime loans are those going to borrowers with a much higher risk of default that a typical loan.
Australia 'out at the front' of subprime market

While subprime remains something of dirty word in the economies hardest hit by the GFC, Australian lenders are increasingly willing to step up and fund subprime loans by selling what are known as residential mortgage backed securities (RMBS).

"Australia is out there at the front of the market, I would say, so we are the ones that have continued with issuance in this space," Mr Baldi said.

"Since the beginning of 2013, we've seen 10 new transactions in the RMBS market from non-conforming issuers and that's totalled about $3 billion, so that's quite a pick up in volume considering the market did shut down post the crisis in 2008."

While $3 billion sounds like a large amount of money, Mr Baldi says it is a relatively small share of the home loan market, and of RMBS issuance.

"In the year to date we saw roughly about $15 billion of RMBS transactions. Of that, about $1 billion was non-conforming, so we'd say about 7 per cent of issuance this year has been from the non-conforming market," he added.

Moody's says most of these loans are being written by non-bank lenders.

However, Mr Baldi is confident that there is enough regulation in place to avoid a subprime crash similar to that in the US in 2008.

"One of those is the National Consumer Credit Protection Act, and this basically requires lenders to take reasonable steps to verify a borrower's financial position and their ability to repay the loan," he said.

"Essentially this gets around the fact that in the US you saw those loans being written to borrowers pre-2008 with little to no income verification. In Australia that just can't happen."

The United States is still managing the fallout from its subprime crisis.

Last week, finance powerhouse Bank of America Merrill Lynch agreed to an almost $US17 billion settlement for its role in the crisis.
Australia's biggest danger in prime mortgages

Despite that history, banking analyst Martin North sees Australia's non-conforming market as much safer.

"Most of the investors now, the people who are buying these mortgage-backed securities, are now Australian investors rather than overseas investors," he said.

"So there is a bit of a feedback loop going on, and that does mean that some of the other players who might be buying those securitised loans now are essentially home-based rather than offshore-based."

Mr North says the subprime segment of Australia's market is so small that it is unlikely to destabilise the financial system, even if a lot of the loans go bad.

However, he says Australia's banks, households and the economy in general is too heavily reliant on real estate.

"This is a very small proportion of a much bigger question about leverage into property," he warned.

"We have a massively leveraged financial services system into property more broadly.

"If we have the sorts of defaults we're talking about in the non-conforming sector, then you would also be having, I think, similar defaults more broadly across the market, and it's those broader defaults across the market that would be of much more concern rather than the non-conforming element, which I think is quite small and quite isolated."

Don't Get Burnt by The Property Market

Don't get burnt by the property market

How seriously should property investors take recent warnings that Australian property prices are 20 per cent to 30 per cent higher than they should be and that there is an impending apartment glut in 2017? 

Whatever the fundamental basis for these and similar warnings, existing and new property investors need to be aware of the potential downside.

The basic issue is to understand the risks involved with  investments already owned or being purchased. While less popular for purchases of listed assets including shares and property trusts as well as managed funds, large levels of borrowing are widely used to help acquire direct property holdings.

This high level of gearing helps to drive up property prices in good times such as the present and down when markets turn down, for example due to increased levels of vacancies and/or falling rents. Currently, strong foreign buying interest, low interest rates and a shortage of available stock is forcing and encouraging new investors to bid up prices.

While it may be some time off, a similar downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations. Compared with share market falls which can be brutal and swift, downward property price movements are generally protracted as sellers holding out for higher prices ultimately are forced to lower their expectations.

A special feature of the apartment market can, however, result in distressed forced sales. This is when a large number of off-the-plan sales negotiated before or during construction fall through. A recent example of this occurring is the setback in the Canberra apartment market due to over-supply and reduced public sector employment opportunities.

In this situation, a significant percentage of off-the-plan  buyers were either unable or unwilling to complete their purchases. The resulting forced sales depressed asset valuations and made it more difficult for heavily geared purchasers to obtain credit to meet their commitments.

The key message for individual investors is to be aware of these and other risks before entering into off-the-plan contracts. While one benefit of off-the-plan purchases is what can often be a lengthy time lag before money is required to complete the purchase, this can be a negative if personal circumstances change or property valuations fall before the settlement date..

The chances of both of these changes increase with the amount of time before completion. The risks are also greater in situations such as the present time when contracts are entered into in a buoyant market. So even if the warnings of problems ahead don't prove accurate, they are a timely reminder to avoid becoming over-committed to a future large heavily geared property purchase.

How Almost 300,000 SMSFs Avoid Paying Income Tax

Only a fraction of Australia's ­half-a-million self-managed super­annuation funds pay any income tax, experts say, because of generous super concessions and franking credits that are undermining the federal budget.

Tax Office statistics show almost 300,000 self-managed superannuation funds eliminated or reduced their tax bills through exemptions on super and $2.5 billion in franking credits in 2011-12. 

These are the most recent records available, although experts say the surge in dividend payments since then has further reduced the small amounts of tax paid by these funds, which are often the primary income of wealthy retirees.

At the time, 424,360 funds generated gross taxable income of $32.9 billion. About $15 billion of that was entirely exempt from income tax because the funds were in the pension phase, which doesn't incur income tax.

Self-managed funds contribute little to the tax system – because about half of the funds' assets are already in the ­pension phase, Tria Investment Partners principal Andrew Baker said. Also, most self-managed funds receive franked dividends, which cuts the tax bill of many other funds to zero.

"It's a problem isn't it?" Mr Baker said. "It's unlikely SMSFs are ever going to pay a substantial amount of tax as a segment."

The loss of revenue will rise because of an ageing population shifting assets into pension phase and the greater payment of dividends, he said.

Pressure is growing to focus on superannuation tax breaks in the Coalition's planned review of the taxation system. The government is desperate to find ways to reduce the budget deficit.

There have been frequent calls for the government to stop the concessions. The head of the Financial System Inquiry, David Murray, recently suggested Australia's dividend imputation system, which SMSFs are also capitalising on, needed to be looked at.

The roughly 1 million Australians with investments in self-managed super funds argue that having spent their careers paying income tax and following the rules they shouldn't be penalised for saving for retirement.

"Super funds, including SMSFs, are taxpayers, and franking credits should be available to all taxpayers," SMSF ­Professionals' Association of Australia's technical and professional standards director Graeme Colley said.

Experts say it would be better to tax the earnings of superannuation funds in pension phase at 15 per cent, rather than try to get rid of franking credits, which could see share prices plummet.

A fundamental change 

Australia and New Zealand are now the only two developed countries that have full imputation of dividends.

Mr Baker said scrapping Australia's dividend imputation system, would involve "a fundamental change to the taxation system" that would be hard to implement. He said a better way to address the problem was a 15 per cent earnings tax for those in the pension stage. Another option was to copy the United States' minimum taxation rate, "that in short says everybody pays an amount of tax".

Ending franking credits could ­trigger a political backlash from ­investors and "would be reintroducing double taxation, so there are enormous problems with it", Mr Baker said.

"The UK did a similar thing 15 years ago, denying pension funds franking credits, and they got away with it . . . despite the protest." He said a tax rate on the pension phase would also stop gearing by SMSFs.

Tax Office data shows SMSFs have an interest expense bill of about $375 million a year, but Mr Baker said that's just the tip of the iceberg.

The data comes from SMSF tax returns, but it is common for SMSFs to achieve gearing outcomes by in­vesting in private property trusts. He estimated the overall interest expense for the sector would be about $500 million annually.

Grattan Institute chief executive John Daley said any change to dividend imputation would have to be part of a package that also reduced the company tax rate and personal tax rates.

He said the difficulty with scrapping imputation was that it would "create incentives for companies to hoard ­capital rather than returning it to shareholders, which may reduce the efficiency of investment decisions".

Instead, the government should wind back superannuation tax breaks for the old and wealthy. "The easiest way to do this would be to tax the income and capital earnings of super funds in pension phase at 15 per cent," Mr Daley said. "These funds would then pay tax on earnings at the same rate as the super funds of those aged under 60."

He said there was no reason to grandfather this change.

"Anyone who is in pension phase can withdraw the entirety of their super fund tomorrow, and if they think they can find an in­vestment on which they will pay less than 15 per cent tax, good luck to them," Mr Daley said.

"I'm guessing that there will be very few withdrawals."

'It ain't going to happen'

At the end of 2012, the average SMSF had $920,000 (typically funds are made up of more than one person: couples).

According to a 2012 ASX study, about 52 per cent of SMSFs directly hold ­Australian shares. Tax Office data shows of the $550 billion invested in SMSFs, $180 billion is directly invested in Australian-listed shares, which is already higher than the average of APRA-regulated funds.

Leading economist Saul Eslake said he was "undecided" about whether dividend imputation should be scrapped, although he had previously mentioned it is a costly tax break that the wealthy use to lower their marginal tax rates.

He said that like negative gearing, there are now so many who benefit from franking credits – SMSFs, investors and members of larger public or industry super funds – that "no matter what the intellectual merits of getting rid of it, it ain't going to happen for political reasons".

"Almost certainly, the benefits of franking credits are capitalised into the share prices of companies that have high franked dividend yields, so it seems almost inevitable that abolishing dividend imputation would cause share prices to fall, unless there were an equivalent reduction in the company tax rate," Mr Eslake said.

David Murray said in his review of the financial sector the imputation ­system – first introduced in 1987 and estimated to cost about $20 billion a year – had created a bias where in­dividuals and super funds preferred shares and this had hindered the growth of the domestic corporate bond market.

PwC's submission to the Murray inquiry said "careful consideration should be given to whether there would be benefits to be obtained from modifications to the imputation system"

Property-Related Firms Rake in Revenue From Real Estate Boom Australia

Property exposed companies have reported "tremendously successful" and "best ever" results thanks to the booming housing market.

Developer Mirvac saw its full year profit spike 220 per cent to $447 million dollars.

Shareholders will receive a final dividend of 4.6 cents a share, taking the full year payout to 9 cents unfranked.

Strong residential sales lifted the result, with a total $1.2 billion of exchanged pre-sales contracts in hand and a slightly better than forecast 2,482 properties settled.

Chief executive Susan Lloyd-Hurwitz says the year has been "tremendously successful" and has set the company up for the future.

That future is very focused on building apartments to feed what it believes will continue to be high demand, particularly in Sydney and Melbourne.

Chief investment officer Brett Draffin says the strong sales and price momentum seen over the past financial year is set to continue, albeit at a "slightly more moderate level."




He is not concerned about the flood of units that is expected to come onto the market in the near term.

"Fundamentally increased stock levels are insufficient to overcome the national undersupply, there is a high level of activity from offshore buyers in select locations and product types," he told investors.

"We expect demand volumes to continue to grow driven by tight rental vacancy population growth and a strengthening of the economy."

Mirvac has spent $248 million on new sites, two-thirds of these acquisitions were in NSW, less than a fifth were in Victoria, and the remainder in Queensland and Western Australia.

Half of the lots to be released this year are in Sydney, and almost all of them are units.

Mirvac believes the major acquisitions it has made will see residential development drive earnings from two years time onwards.
Mortgage broker boosts earnings

Mortgage broker Mortgage Choice has also benefitted from the fever that has swept the residential property market over the past year-and-a-half, boasting a best ever full-year result.

Full-year net profit rose 6 per cent to $19.85 million, and cash profit jumped 19 per cent to $18.7 million.

The final dividend was boosted to 8 cents a share, fully-franked.

The company says it "managed to capitalise on the industry tailwinds and significantly grow its core business."

The business wrote $12.2 billion in loan approvals, which is almost 20 per cent higher on the prior year, and the loan book rose to $47.4 billion.

Chief executive Michael Russell says it is the best result so far for the company.

"We have embraced the opportunities that the strong market has presented us with and managed to deliver some of our best financial results to date," he said.

The company says it is well on its way to achieving its goal of becoming a recognised diversified financial services provider.

"We will continue to focus on our growth and diversification moving forward."

Sydney Inner-City Apartment Market Glut Predicted to Push Prices Down

Sydney Inner-City Apartment Market Glut Predicted to Push Prices Down

A leading economic forecaster is warning that oversupply will cut Sydney apartment prices by up to 10 per cent.

The report by BIS Shrapnel estimates that 5,800 apartments are being built in inner-Sydney right now, with almost as many again planned to be completed over the next few years.

The report says the peak annual output of 4,500 units in 2016-17 is comparable to the last boom in 1999-2000, but the average of 3,800 new inner-city apartments per year over three years will be a record.

BIS Shrapnel's senior manager of residential property Angie Zigomanis, who wrote the report, says developers have been playing catch-up after a decade of undersupply in Sydney, but they look like soon getting ahead of themselves.

"The population growth in Sydney still stays pretty strong, rental demand will still be fairly strong, but it's just that the level of apartment construction now is moving up to a level that's probably approaching a level that's too high and that's unsustainable in the long-term," he told ABC News Online.

Mr Zigomanis does not expect this to occur in the short-term, but warns that the wave of new developments over the next few years is likely to result in supply exceeding demand.

"Once the market starts getting into oversupply then rents either flatten out or start falling," he said.

"This has the potential to also coincide with the Reserve Bank looking to start tightening interest rate policy as well and that combination will see the investment equation change and investors start becoming less confident about the market and prepared to pay lower prices for dwellings.

"So any new apartments that come back onto the market are likely to experience some sort of loss two or three years out from now."

Mr Zigomanis says the losses are unlikely to be large, but may prove a serious setback for those buying off-the-plan now expecting capital gains.

"Depends on location, etc, but I wouldn't be surprised if from their current purchase price they don't experience losses of perhaps 5 per cent, and perhaps selected developments up to 10 per cent."

In results released last week, property developer Mirvac said it planned to focus heavily on increasing apartment developments in the Sydney market, expecting that segment to remain strong for the next five years.

Mr Zigomanis says a lack of pre-sales a couple of years hence may force a rethink of such optimistic strategies.

"They require a certain level of pre-sales before they go ahead with construction," he said.

"Over the next couple of years we expect pre-sales will be pretty strong so it should be able to sustain the number Mirvac are talking about, but if they were assuming that demand would stay at current levels over the next say five years we suspect that won't be the case.

Chinese Investor Frenzy Adds Fuel to Inner-City Sydney Apartment Boom

THOUSANDS of Chinese investors piled into a property expo in Sydney’s Town Hall on the weekend as analysts tip overseas buyers will keep the city’s inner city apartment market booming for the next two years.

Close to 50 companies jockeyed for the attention of the cashed up Chinese buyers, with apartment projects being spruiked by development giants Greenland Holding Group, MAB Corporation and Frasers Property Australia

About 50 companies jockeyed for the attention of the cashed-up Chinese buyers, with apartment projects being spruiked by development giants Greenland Holding Group, MAB Corporation and Frasers Property Australia.

The property frenzy came as Sydney and Melbourne kicked off the spring auction season with strong results, posting clearance rates of 83.4 per cent and 75.3 per cent respectively on total sales of $545.7 million, according to preliminary figures released by Australian Property Monitors.

“The (auction) results were extraordinarily strong,” said APM senior economist Andrew Wilson. “The Sydney market just keeps rising. Certainly there is no sign of a waning of activity.”

He said a lot of the buyer ­action was driven by investors rather than owner-occupiers.

At the Sydney property expo Maggie Wang bought a house in Bellevue Hill, in Sydney’s east, for about $6m.

Ms Wang, who migrated three years ago, ran an IT and property development company in China and had recently started a wedding planner business in Australia. She said Chinese interest in Australian property was about more than just making money.

“People like the lifestyle, the country and the environment, it’s not just about investment,” Ms Wang said.

Another buyer, 26-year-old Crystal, bought a home in one of Sydney’s wealthiest suburbs, Vaucluse, for more than $5m, with plans to buy more Australian investment properties.

The expo also featured agencies, such as ABC World, which give Chinese investors advice on migrating to Australia through avenues such as the Significant Investor Visa. The visa, implemented by the former federal Labor government, allows foreigners who invest more than $5m in Australia the potential for permanent residency.

Black Diamondz director Monika Tu, who represents wealthy Chinese looking to buy Australian homes, said the visa’s introduction had led to a surge in interest for local trophy homes worth more than $5m.

Ms Tu said inquires to her agency from Chinese property hunters had increased by about 50 per cent this year.

Also at the expo, one of China’s largest developers, Greenland Holding Group, held expressions of interest for its second local project, the $200m ­Lucent apartment tower in North Sydney, while Singaporean-backed Frasers Property Australia marketed apartments at its $2 billion Central Park project at Sydney’s inner-city Chippendale.

The high investor demand for off-the-plan apartments is ­expected to keep Sydney’s inner-city market in boom mode for the next two years, according to forecaster BIS Shrapnel.

BIS Shrapnel said about 5800 apartments were under construction in Sydney while about 11,500 new apartments would be completed over the next three years — the biggest number in the city’s history. CBRE managing director of residential projects David Milton said the uplift in interest from Chinese investors allowed local apartment developments to stack up financially.

At Australian Mint, History Thwarts a Golden Opportunity

Greg Cooke knows where gold worth hundreds of thousands of dollars is hidden. But like many people in this mining city, his problem isn't finding the precious metal; it is being able to recover it.

That's because the gold is in the form of dust that has accumulated in the brickwork of the old Perth Mint since its founding in the 1890s at the height of one of the world's great gold rushes. Decades of refining resulted in tiny fragments of gold embedding themselves in the fabric of the mint's historic melting house. To paraphrase a well-known bit of mining lore, there's gold in them thar walls!

"The gold in the walls isn't visible. You can't see it," said Mr. Cooke, a gold pourer at the mint. "But the moment you point it out to people, you see their eyes darting around the room with excitement."

Security is unobtrusive in the melting house, which was decommissioned in 1990. On any given day, tourists seeking a fix of Australia's gold rush history wander around the room pretty much undisturbed though they are within spitting distance of the secret hoard.

"I'd love to have a scrape," said Sacha Hibbitt, a 19-year-old student from England who was visiting Australia with a friend. "I like gold, and it would be nice to sell to pay for our trip."

It is a different story at the mint's current gold-refining hub near Perth airport, 10 miles away. There, the mint doesn't allow visitors and all employees must be vetted by the police's Gold-Stealing Detection Unit—nicknamed the "gold squad." To get to work requires passing through something like airport security, including metal detectors, while employees' every move is captured by cameras.

In 2011, the Perth Mint produced the world's largest gold bullion coin, weighing one ton and worth about US$50 million. The coin had its own security detail on a recent roadshow around Europe and Asia, even though it takes heavy-lifting equipment to move it around.

When 14 of the 15 old furnaces in the Perth Mint's melting house were scrapped, they were crushed and around 18 kilograms of gold was recovered, worth around US$800,000 at today's prices. That inspired management to look a little higher, sending a young worker up for days to scrape the ceiling for gold.

"It is one of those old corrugated roofs, so we got a young kid on a cherry picker, hoisted him up with a wire brush and told him to start scraping," said Mr. Cooke. He recovered an extra 1.5 kilograms.

Around the time the mint was founded in the 1890s, thousands of people were working on gold deposits in Western Australia. Among them was a young American engineer named Herbert Hoover, who managed the Sons of Gwalia mine for a year before returning to America. He became the 31st president of the U.S. in 1929.

Nuggets unearthed in the red clay of the Outback were brought to Perth to be melted down into gold bars or coins.

How the gold came to end up in the mint's walls is explained by the old technology. For decades, gold was refined using charcoal and coke, which were variable in temperature. When the furnaces got too hot, sometimes reaching 1,700 degrees Celsius (3,092 Fahrenheit), it caused the gold to vaporize and lodge itself in the brickwork.

In the 1950s, officials became so worried by the scale of the losses that they installed a device in the mint's main smokestack to catch gold dust.

Mr. Cooke believes there is still more gold in the walls of the mint. "All I want to know is who does the cleaning?" said Julie Bitton, 48, who was visiting the mint from New South Wales with her 14-year-old daughter, Marley.

Still, harvesting the precious metal isn't likely to happen soon, if at all. Gold's appeal cuts little ice with Western Australia's heritage officers who demand the walls remain untouched because of the building's heritage listing. This year's massive renovation of the old mint, which stands on the same site where it was established, excluded the melting house.

"It is important that works to heritage places are undertaken with care to try to protect the elements that tell the individual stories of a place," said State Heritage Office Executive Director Graeme Gammie. That includes protecting old woodwork and even original paint.

Disappointed prospectors should draw comfort from the fact that gold is found in plenty of unusual places—from termite mounds to the human body.

Last year, Australian scientists found that eucalyptus trees in the Outback were drawing gold particles up from the soil via the trees' root system and depositing them in their leaves and branches. Alas, these nuggets are only about one-fifth the diameter of a human hair.

Back at the old mint, Mr. Cooke says the brick walls aren't the only hidden store of gold. Officials carry out nearly 50 gold-pouring demonstrations for tour groups each week, and residue of the precious metal that remains in the clay-and-graphite pots needs to be recovered. Every two weeks, the pots are crushed to recover gold worth as much as US$200 apiece.

"We lose a gram of gold a day in the furnace or the pots or from spilling," Mr. Cooke said. "That is an ounce a month and might not sound like a lot, but it is a lot for our accountants.