News broke yesterday that a hedge fund manager and an economist posed as a gay couple earning $125,000 per annum to tour housing developments in Sydney’s west and discuss finance with mortgage brokers.
It was a tale that combined almost all the fears regulators, economists, and property watchers have about the potential excesses that have built up in the Sydney property market.
John Hempton from Bronte Capital and economist Jonathan Tepper from Variant Perception told the AFR of interactions with developers and mortgage brokers which included advice that if you lie on your loan application it won’t get checked, that lower income earners can get an interest rate discount, and that some banks will allow multiple positive revaluations in order to help investors buy additional properties.
Hempton and Tepper also said the districts they toured – west and north-west Sydney – had been overbuilt.
“Go drive around western Sydney at the moment. It was pretty obvious to us there was a lot of unsold inventory,” Hempton said.
The anecdotes Hempton and Tepper shared are worrying for the housing market and the broader Sydney, New South Wales and Australian economy. They speak to a potential instability not unlike areas of he US housing market pre-2007.
But while anecdotes are powerful tools to tell stories, the question of dodgy brokers and overbuilt suburbs needs to be tested.
We asked John Flavelle, CEO of Mortgage Choice – one of Australia’s largest mortgage brokers – what he thought of Hempton and Tepper’s claims.
Flavelle didn’t agree that the west and north-west are in the grip of a housing bubble.
“To determine whether or not we are in a housing bubble, we need to look at the macro level which shows our housing system is based on supply and demand,” he said. “Demand is driven by three key metrics: population growth, employment and the cost/availability of credit.”
He highlighted that after many years of underbuilding, 2015 was “the first time in a very long time that supply has actually come close to meeting demand”.
“In addition, there is nothing to suggest we should soon see a significant spike in unemployment or interest rates, which means the cost of borrowing will continue to be affordable and housing demand will remain strong.”
Flavelle’s points go to the very heart of the housing boom/bubble crash debate.
There are risks in Australian housing. But the conditional probability of the set of circumstances that would be required to cause the type of housing crash that occurred in the United States and lead to the GFC appear low.
“If we were going to see a massive slump in house prices, not only would we need everybody to sell their properties at the same time, but we would need to see a significant oversupply of properties,” he said. “I do not expect this to happen.”
But while the debate about property prices is interesting in many ways, the most troubling anecdote Hempton and Tepper shared was the one Flavelle thought had “accused mortgage brokers of being disreputable”.
That’s doubly troubling because embedded in those anecdotes was the implication that banks have dropped the ball on credit and lending standards. If that’s the case then the analogue between Australian housing and US housing pre-GFC becomes much stronger.
On broker practices Flavelle said that:
“Mortgage brokers work under robust legislation. They have strict compliance requirements imposed upon them and always act within the best interests of their clients.”
In the context of Hempton and Tepper’s anecdotes about lying on applications, Flavelle added a crucial caveat that “our lender partners have told us that the quality of broker-originated loans are the same (if not better) as bank-originated loans – and that quality is incredibly high”.
He also seemed surprised about claims income verification is not performed effectively, noting both brokers and the banks “conduct thorough checks”.
“To me, the statements made by Jonathan Temper and John Hempton are long on anecdote and short on data,” Flavelle said.
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