The fall of Stuy Town is a warning for local home owners, writes Bernard Lagan in New York.
THE brackish towers of Stuy Town's 11,000 apartments, sentries along Manhattan's East River for more than 60 years, are far off but the tremors from their astonishing transition to the world's biggest property investment failure are reaching the world over - including the worried scholars of Australia's soaring property market.
The bullish argue that a property slump on the scale of America's devastation couldn't happen here. Today's Australian property prices, they say, are buoyed by the housing demands churned by high immigration, a scarcity of new developments and a barrelling economy.
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.
Among them - on a far grander scale - were the investors who paid $6.4 billion in 2006 for Manhattan's Stuy Town apartments, a complex built immediately after Word War II and so vast that its 110 connected apartment blocks have their own newspaper. The lenders to the deal included the world's savviest property speculators, such as the Singapore government and the Church of England. They watched in horror as the asset crashed to a value of less than $2 billion. Last last month the humiliated owners - they had borrowed $4.4 billion - handed back the keys to their banks and walked off.
The disaster quickly became the poster child for the walk-off, known as ''jingle in the mail'' - the sound of a set of keys to a ruined property investment arriving on a bankers' desk.
Very few Americans owed more money than their homes were worth when the nation's home prices began to fall in mid 2006. By the third quarter of last year, about 4.5 million home owners had reached what is now seen as a point of no return - when the value of a home drops below 75 per cent of what is owed on the mortgage. Those numbers are expected to climb to more than 5 million by the middle of this year, meaning that 10 per cent of all Americans with mortgages will be underwater.
That is the point, according to new research published last week, where home owners start to consider walking away.
Hardly anybody believes a severe slump in Australia is imminent. Most agree that the property price boom has a way to run and, according to Fujitsu, prices are likely to rise by as much as 10 per cent by December.
But how will it end? One expert who has long followed the market, Steve Keen, an associate professor of economics and finance at the University of Western Sydney, sees a portent in the rising numbers of stressed borrowers.
He believes Australia's volume of house sales will eventually fall away as buyers hold off so as to first save a bigger deposit. Meanwhile sellers, accustomed to higher prices, won't take what they're offered. Housing speculators will eventually start taking losses, he says, which will lead to a fall in the property market.
A Flinders University associate professor, Dr Joe Flood, a housing economist, says: ''I am certainly not the only one who believes a housing correction is inevitable. Long experience with markets has taught me not to try to call [the peak of a bubble]. [The property price rise] will stop when banks stop lending, which almost always happens when some sort of scare ensures.
''There are few precedents for bubble soft landings, and governments rarely have the stomach for the hard decisions involved.''
Half a million Americans have just learnt that in the hardest of ways.
THE brackish towers of Stuy Town's 11,000 apartments, sentries along Manhattan's East River for more than 60 years, are far off but the tremors from their astonishing transition to the world's biggest property investment failure are reaching the world over - including the worried scholars of Australia's soaring property market.
The bullish argue that a property slump on the scale of America's devastation couldn't happen here. Today's Australian property prices, they say, are buoyed by the housing demands churned by high immigration, a scarcity of new developments and a barrelling economy.
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.
Among them - on a far grander scale - were the investors who paid $6.4 billion in 2006 for Manhattan's Stuy Town apartments, a complex built immediately after Word War II and so vast that its 110 connected apartment blocks have their own newspaper. The lenders to the deal included the world's savviest property speculators, such as the Singapore government and the Church of England. They watched in horror as the asset crashed to a value of less than $2 billion. Last last month the humiliated owners - they had borrowed $4.4 billion - handed back the keys to their banks and walked off.
The disaster quickly became the poster child for the walk-off, known as ''jingle in the mail'' - the sound of a set of keys to a ruined property investment arriving on a bankers' desk.
Very few Americans owed more money than their homes were worth when the nation's home prices began to fall in mid 2006. By the third quarter of last year, about 4.5 million home owners had reached what is now seen as a point of no return - when the value of a home drops below 75 per cent of what is owed on the mortgage. Those numbers are expected to climb to more than 5 million by the middle of this year, meaning that 10 per cent of all Americans with mortgages will be underwater.
That is the point, according to new research published last week, where home owners start to consider walking away.
Hardly anybody believes a severe slump in Australia is imminent. Most agree that the property price boom has a way to run and, according to Fujitsu, prices are likely to rise by as much as 10 per cent by December.
But how will it end? One expert who has long followed the market, Steve Keen, an associate professor of economics and finance at the University of Western Sydney, sees a portent in the rising numbers of stressed borrowers.
He believes Australia's volume of house sales will eventually fall away as buyers hold off so as to first save a bigger deposit. Meanwhile sellers, accustomed to higher prices, won't take what they're offered. Housing speculators will eventually start taking losses, he says, which will lead to a fall in the property market.
A Flinders University associate professor, Dr Joe Flood, a housing economist, says: ''I am certainly not the only one who believes a housing correction is inevitable. Long experience with markets has taught me not to try to call [the peak of a bubble]. [The property price rise] will stop when banks stop lending, which almost always happens when some sort of scare ensures.
''There are few precedents for bubble soft landings, and governments rarely have the stomach for the hard decisions involved.''
Half a million Americans have just learnt that in the hardest of ways.
