For UNSW Business School economics professor Richard Holden, the Australian property market has not learned from the meltdown seen in the US a decade ago.
In an opinion piece published on the university’s website, Holden explained some bothering mortgage signs seen in Australia. For one, he said Australian lenders tend to let property owners borrow a lot compared to their incomes. He noted that Australian banks would lend about 25% more for the same income level than with what a major US bank would now lend.
Holden added that the structure of loans in Australia is often on the risky side. Citing figures from the Australian Prudential Regulation Authority
(APRA), 35.4% of home loans are interest-only. This figure has already dropped from above 40% following APRA's cap on the amount of new interest-only loans.
"Interest-only loans in Australia typically have a five-year horizon and to date have often been refinanced. If this stops then repayments will soar, adding to mortgage stress, delinquencies, and eventually foreclosures," Holden said, noting that in the US, one of the key triggers of the housing meltdown was when five-year adjustable rate mortgages could not be refinanced.
Another troubling market Holden indicated is the increasing number of liar loans. To recall, a recent UBS survey found out that around 30% of home loans representing $500 billion could be affected by this trend.
However, Holden said the biggest marker of all is the response from lenders to these issues. He took ANZ chief executive Shayne Elliot's statement as an example. In an interview, the ANZ chief said it is not in the bank’s interest to lend money to people who can't afford to repay.
"And if it was them lending their own money then I might believe it. But people act differently when they are playing with other people's money. That is the essence of the moral hazard problem," Holden commented. "One of the key lessons from the US experience was how highly correlated the risks on mortgages are. Do Australia's lenders really not get that?"
For Holden, this seems to indicate that Australia is freely committing the same mistakes the US market carried out. "People borrow too much and banks let them; there are moral hazard and fraud in mortgage issuances; regulators finally do something – very little and very late," he said.
For him, the only silver lining in this situation is the macro-prudential regulation and the improvement in underwriting standards.
"Even if that is true, we are still left with highly indebted households who have nearly $2 of debt for every $1 of GDP, a raft of interest-only loans that will soon involve principal repayments, and stagnant wage growth. Having lived in the US during the mortgage meltdown I'm sorry to say that I've seen this movie before. The question is: why haven't our bankers," he said.
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