The acceleration in the decline in home prices shown in Corelogic's latest report is emboldening our housing bears with one research firm warning that the value of residential property in Melbourne and Sydney could plummet 15% to 20% as Australia struggles with its own sub-prime crisis.
This bearish call from Endeavour Equity Strategy that's carried in the Australian Financial Review will add to the gloom on our market today with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index dipping into the red at the opening bell on a negative lead from Wall Street overnight.
The research firm believes that 40% of all mortgages are "non-prime" – meaning borrowers are spending over 40% of their income on servicing the loan.
It's sub-prime borrowers in the US that triggered the GFC, which is the worst global market meltdown in living memory.
Endeavour Equity claims that non-prime borrowers were three to five times more likely to default on their loans during a market downturn.
The drop in the residential market has been triggered by tighter access to loans, poor wages growth, record high household debt and waning demand for investment properties from overseas investors.
It hasn't been caused by the "non-prime" issue although it will be the primary reason for a sharper-than-expected fall in our housing market – if such a gloomy outcome were to pass.
Non-prime lending by the banks has been hidden from investors as our largest mortgage lenders have been relying on the flawed Household Expenditure Measure (HEM) to assess the quality of borrowers, according to Endeavour Equity.
If more objective measures are used, a household on an annual income of $150,000 will see their ability to borrow drop by around 36%.
The claims by Endeavour Equity fly in the face of the assurances given by Westpac Banking Corp (ASX: WBC), which had to defend itself when a PwC report showed a substantial proportion of loans (from a sample) issued by the bank failed to meet minimum lending requirements.
This issue won't be limited to just Westpac. I am sure that the other big banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are struggling with similar demons.
The big four banks control about 80% of the mortgage market and I have long been underweight on the sector because of my worries about the Aussie property market and lending practices.
There isn't enough transparency over this issue with official economic data on household balance sheets not marrying up to claims made by the banks.
Until we can have greater confidence on this front, it is best for investors to stay underweight on bank stocks.
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