Of all the regions in the world that are currently experiencing some kind of property bubble, Australia deserves a special mention. Thanks to China’s insatiable demand for commodities, Australia’s economy has boomed over the past several decades, incomes have soared, and property prices have surged, thanks in part to rising incomes as well as demand from Chinese property investors. But things may be even worse with new numbers about housing liar loans in the land down under.

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However, ordinary Australian's have struggled to keep up with rising prices, but that hasn't stopped them from buying. Mortage lending has grown dramatically, and Australia now has the second highest level of household debt in the world, with a debt-to-income ratio of 190%, and at least 60% of banks’ loan books are related to housing.

This credit bubble is now starting to cause concern. According to Willem Buiter, Citigroup's chief economist, Australia is experiencing a "spectacular housing bubble," which needs to be addressed with tougher regulatory measures. Meanwhile, a report titled, “The Big Rort”, by LF Economics founder Lindsay David argues that the Australia's housing market has become a $1.7 trillion “house of cards” as Australian banks’ use of “combined loan to value ratio” has "exacerbated risks in the housing market as little to no cash deposits are used.” This model has essentially created a "classic mortgage Ponzi finance model” according to David's report.

Another report, this time from UBS's Evidence Lab analysis, published today, strikes a similarly bearish tone about the state of the Australian property market.

$500bn In Housing Liar Loans?

To try and gauge the condition of the mortgage market, UBS's researchers conducted a survey of 907 Australians who have taken a mortgage over the last 12 months, to build a picture of who was applying for loans and how they compiled their applications.

According to the report, only 67% of respondents stated their mortgage application was "entirely factual and accurate" in 2017, down from a response rate of 72% last year. 25% of participants said their application was "mostly factual and accurate," 8% said it was "partially factual and accurate", while 1% "would rather not say." Another question in the survey asked respondents to compare the mortgage process against previous experiences. Here 46% of respondents stated it was easier to get a mortgage approved than previously, compared to 17% who said it was harder. These responses indicate that "despite recent macroprudential policies...and the fact that mortgage approvals remain at record levels implies that there is little evidence mortgage underwriting standards have been tightened through the eyes of the consumer."

Specifically, the analysts write:

 

Housing Liar Loans

Another question in the survey asked respondents to compare the mortgage process against previous experiences. Here 46% of respondents stated it was easier to get a mortgage approved than previously, compared to 17% who said it was harder. These responses indicate that "despite recent macroprudential policies...and the fact that mortgage approvals remain at record levels implies that there is little evidence mortgage underwriting standards have been tightened through the eyes of the consumer."

All in all, considering the findings from this latest questionnaire, and those of previous years, UBS's analysts estimate that there are as many as $500 billion of "factually inaccurate mortgages on the banks' books."

To put that in perspective using population ratio that would be about $5 trillion in US terms.

Will housing liar loans bring down Aussie RE?