A quote from the article for those who think Australia doesnt have its own version of Subprime.
Of course we do. Have a look at some of the answers to the FAQ at this mortgage originator:
http://www.reactiv.com.au/faqs.aspx
100% loan & no need to show you have any earnings, if you are "self-employed".
Keep in mind however that subprime was only the first bit of the housing domino to fall in the US. The price crash that has resulted from this has now seen increasing numbers of Americans holding some seriously negative equity in their homes, which is prompting ever larger numbers of even credit worthy borrowers to resort to what the Yanks call "jingle mail" - i.e. put the keys to you house into an envelope, post to your bank and walk away.
As the numbers of these people increase, banks are faced with having to fire sell ever increasing numbers of properties into an already distressed market, which then precipitates another round of the same thing.
In this article, a respected US property blogger "Calculated Risk" explains the mechanism and the possible outcomes:
http://tinyurl.com/2fw5kb
He estimates that if house prices decline by 10% in 2008, this would see around 10.7 million of households with negative equity, prompting at least some of them to walk away.
The article dates back from December 2007 and the latest data shows that in fact the number of distressed households could now be as high as 12 million and perhaps even higher. Some experts now believe that the overall decline in house prices may be as high as 30%, which would mean over 20 million households in strife!
The fallout from this could destabilise and even bankrupt the entire US financial system. Calculated Risk covers this in this article:
http://tinyurl.com/yvddb8
His conclusion is that an across-the-board average fall in house prices in the order of 15% would result in up to USD 1 trillion of losses; if prices drop by 30%, it could be over USD 2 trillion!
The losses reported up to December 2007 were in the order of $70-80 billion - chickenfeed in comparison. Yet look at the effects already!
Can anyone imagine such a scenario? Such numbers? -- Yet it appears entirely plausible, given the recent trends.
Note that there is no mention of "subprime" in any of this!
Could this happen in Australia?
Perhaps not quite to the same effect; our home loans are not typically structured like a put option, so if the bank can't sell for what it's owed, they are likely to chase the defaulting borrower for the difference. This mean that our own version of "jingle mail" is unlikely; however in case of higher unemployment and subsequent widespread defaults, banks would be looking at losing billions just the same, as many people are forced to declare themselves bankrupt.
It is not a nice scenario and I am personally increasingly worried about the possibility of it happening. The old saying that if the US sneezes, the rest of the world catches the flu is still very much the truth. Just look at the massive write downs at various European banks and the effect on the share price of our own listed financial companies, big 4 banks included, most of whom have not as of yet disclosed any substantial difficulties.
The Chinese sovereign fund that a few months ago injected a very substantial amount into the US bank bailout has reputedly already lost about 30% of that investment. How long will the Chinese and others like them keep throwing good money after bad?
If the US financial system goes into a systemic meltdown, then we will be facing the most serious recession in at least 30 years. If that happens, I would hate to be a highly geared property - or share - owner.
Tom R.