I expect banking shares to be in trouble when the property bubble bursts. Here's an article that says the Australian property bubble is looking to burst at some point.
Yet on Wednesday one of the unpalatable and less obvious side-effects of Australia's inflating house prices - now deemed by the Economist magazine to be overvalued by 50 per cent - became clearer. The rise in the number of Australian households who are in so much difficulty with their mortgage repayments that they are facing selling up - or being sold up - is continuing its ascent beyond the 200,000 mark reached in November. By this year's end, some 270,000 Australian households will be in severe mortgage stress.
Defaults on mortgage repayments will rise to 35,500 by December - considerably above the present yearly total of about 28,000 households.
All in all, the report produced by the Sydney consultants Fujitsu predicts that by the end of this year some 637,000 Australian households will be under some form of mortgage stress.
No one knows how Australia's housing asset bubble will end. But new American research points to an unexpected and unnerving phenomenon for banks caused by a wave of more belligerent borrowers caught in a property bubble burst.
Many are now more likely to lose their emotional attachment to their homes and walk away, tossing the keys to the bank, even if they have the capacity to keep making mortgage repayments. One published estimate found that 17 per cent of all Americans who default on their mortgage repayments no longer choose to try and tough it out - they walk off.
Except in Australia, you sort of wonder if the terms of the mortgages allow people to walk off. I thought I was being a little bearish when I last read some papers that indicated that the Sydney real estate prices could fall 40%. If The Economist thinks it's over valued by 50%, then it could easily be a 33% drop. So expect it to go down 33-40%.
Most of the people who bought properties this side of 1998 are going to be quite peeved when the bubble bursts. If they got locked into unrealistic mortgages to support unrealistic house prices they bought into, the backlash and recriminations and blame-throwing is going to be something fierce. Which explains not only how the First Home Owners' Grant helped to shore up prices, but why they couched the policy in such a way so as to help the Baby Boomers keep their property values up through the early part of the GFC. Now that those policies are being wound down and the stimulus is being wound down, things could get interesting.
I'm actually not looking forward to seeing this one shake out. The way it shook out in Japan was totally ugly.
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