An RBA official has told a U.S. conference that Americans need to be encouraged to pay down their mortgages quicker to solve the country’s housing woes.
Speaking to the Federal Reserve Bank of Atlanta’s Financial Markets conference, Reserve Bank head of financial stability Luci Ellis drew contrasts between the Australian and American housing markets, saying unique factors led to the U.S. housing bust. One of these factors, Ellis said, was the slow rate at which American homeowners pay down their mortgages compared to their Australian counterparts.
“Paying your mortgage down before the bust is the most effective way of avoiding getting into negative equity once housing prices start to fall. In the long run, this might require adjusting the tax deductibility of mortgage interest for owner-occupiers; it is not a feature of the Australian or Canadian tax system,” Ellis said.
The ubiquity of variable rate mortgages also saw Australians paying more on their mortgages, Ellis said.
“It might be worth considering adjustable rate mortgages in a more positive light. They offer some advantages, at least if they do not have aggressive teaser rates. In particular, they allow the borrower to make prepayments that can be redrawn later if needed. Think of this as like a home equity loan where the maximum balance declines over time. Such loans are common in Australia and have proven a highly effective vehicle for precautionary savings,” Ellis said.
Ellis argued that many Americans held less equity in their homes than Australians due to the former popularity of interest-only loans, negative equity loans and cash-out refinancing. As a result, she said many American homeowners started out in negative equity from the time they purchased their homes.
“Trade-up buyers seem to have high loan-to-valuation ratios in the United States; that doesn't appear to be true in Australia. The result of all this is that the US housing stock is far more leveraged than that in Australia, even during the boom period,” she said.