Real Estate – Australia repeating US mistakes prior to housing market crash, economist warns

Real Estate

Real Estate – Australia repeating US mistakes prior to housing market crash, economist warns

Real Estate – Australia repeating US mistakes prior to housing market crash, economist warns

By Aidan Devine

Real Estate – AUSTRALIA’S lending industry has not learned from the “meltdown” in the US real estate market a decade ago and is repeating many of America’ mistakes, an economics professor at UNSW Business School has warned.

In a recent opinion piece on the university website, Professor Richard Holden said there were “very troubling markers” of imprudent lending and borrowing activity reminiscent of what preceded the US housing market crash.

“I worry that bankers, borrowers and regulators seem not to have learned the lessons of that very painful piece of economic history,” Mr Holden said.

One of the biggest areas of concern was that Australian banks were lending property buyers significant amounts of money relative to their incomes, he said.

He noted in the article that Aussie buyers were getting about 25 per cent more money than what major US banks were now lending buyers on the same income level (adjusted for tax and exchange rates).

Australian home loans were also being structured in a “risky” way, Mr Holden said, pointing to recent figures from the Australian Prudential Regulation Authority showing 35.4 per cent of home loans were interest-only.

The danger for Aussie interest-only loans was that they typically lasted five years and up until recently were frequently being refinanced.

That climate has changed following a clamp down on interest-only loans by financial regulators, which has made it difficult for borrowers to extend their interest-only terms.

The result is that many of the borrowers who can no longer refinance will see their repayments soar once their five-year interest-only term expires, increasing their risk of falling behind in mortgage payments and eventually going into foreclosure.

“A key trigger of the US housing meltdown was when five-year adjustable rate mortgages could not be refinanced and borrowers faced steep upticks every quarter in their interest rates,” Mr Holden said.

Other troubling indicators were that many Australian borrowers were providing inaccurate information about their finances when applying for mortgages and were using personal loans to come up with the necessary 20 per cent deposit.

Many of these trends mirrored the US experience leading up to the global financial crisis, according to Mr Holden.

“Bubble or no bubble, we seem to be blithely repeating the US housing-market experience in almost every respect. People borrow too much and banks let them,” he said.

Recent regulations making it more difficult for investors to access loans were a “silver lining” but risks remained, Mr Holden added.

“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,” he said.

“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?”

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