WA housing bubble looks set to burst

With the mining boom just a memory and residential housing values slipping in the West, Aaron Tucker says the property party looks like ending soon.

THAT'S not a mortgage. That’s a mortgage.

West Australians, like the iconic 1980s ambassador for Australia, have embraced all things big when it comes to residential real estate, but it is nearing time for the chickens to come home to roost.

According to the latest information from the Australian Bureau of Statistics (ABS), the average West Australian full time employee earned a total (including overtime) of $94,744.00 — a rise of 0.15% from the year before.

Based on our current tax rates, this equates to a take home wage of $71,741.72 or $1,379.65 per week.

The average residential building in the Swan state sold for $568,800 in December 2015, down 2.9% from the year before.

In a state with a sliding economy and the big banks being forced into having ever higher capital buffers to protect against an American “Big Short” type slump you would expect high lending standards to be prevalent.

This might not always be the case.

I have recently learned of a loan being approved with only a 3% deposit after costs. This is the same state where residential values slipped 2.9% in the last 12 months.

According to the table below, our WA average income earner and new home buyer will slip into mortgage stress, 30% of pre-tax pay going towards servicing loan payment, almost immediately.

We are having a greater and greater number of people at their limit with household debt. Now, to be fair, Australians are, by and large, great customers when it comes to debt. More often than not we pay on time, or ahead and we hold onto those loans right up until we take out another.

In an environment of falling or stagnant wages and home prices, where you also have a 4% interest bill on a house leveraged at 33 to 1, what do you think will happen if rates increase to the long term average of 7%? Now, at best, you have almost two thirds of your income going into something that merely has to keep you out of the weather.

Defaults. The answer is people will default.

Yes, I know we don’t have the "hand in your keys" policies of the United States, but you can only push people so far before they have no other assets for the banks to take. The thing is, it doesn’t take wide scale defaults to depress markets.

If you have two mortgagee sales (very polite way of saying the bank is selling your home) within a block, this will push down the prices of all houses in the area.

Think about it; do you want to live across the road from the boarded up house? Do you want to live next to the house some squatters newly acquired?

It all sounds so far-fetched and far away, but be warned it could be closer than you think. Every raw material Western Australia exports to the world is now trading at a lower price than it was two years ago. With a bit of a lag these lower prices are feeding through to less mining construction, lower production employee wages and fewer employment opportunities.

It is very possible Western Australia is entering a structural, rather than cyclical, change to its economy. Already, large hedge funds are kicking the tyres of MBS or mortgage-backed securities in preparation of short selling them and making a fortune from the ensuing residential market slump.

(Image via Australian Financial Review / afr.com)

This would be the part where the great Australian dream, that has made so many of your family and friends rich, turns into a nightmare.

We will always need somewhere to live and, as with all other real estate crashes, people kept buying and living in homes. The difference between being in a bubble and being on the other side of a popped bubble is price. One day, people just wake up and refuse to pay the price. They extend themselves only to the point they can have lives. They do not pay 44% of their wages simply to be surrounded by walls.

Those who have a large amount of equity, cash on hand and stable jobs will come through the downturn just fine; shaken but fine. Those of us who have 3% equity, no savings and an unstable income will fare less well.

JP Morgan, in reference to a recent stock market price surge, once counselled a nervous friend: