Will riskier mortgage lending practices and low deposit home loans by Australian banks lead to a Housing Bubble in Australia?
Australia’s housing markets and mortgage lending missed the worst of the Global financial crisis due to low exposure to toxic loans, a robust economy and good lending practices.
Are the Major lenders now dropping their lending standards in order to capture more of the home loan market?
Home loans with a deposit of 20% or more of the property value give the lender a buffer in a property market that goes South. In addition, there is usually no mortgage insurance costs for the borrower on loans with Loan to value ratios of less than 80%. So the borrower wins with lower mortgage costs, and lower repayments, and the mortgage lender faces little risk if the loan turns sour.
But where Real estate prices have not suffered a correction, and are heading ever higher, some question the wisdom in major banks offering low deposit home loans, lending up to 95%, of the property value and then capitalising the loan costs onto the loan. This can make the home loan up to 97% of the property value.
Mortgage LVRs are rising again
Home loans where more than 80 percent of a market value has risen to the levels of the 2009, at the height of the Global Financial Crisis [GFC].
And “interest only mortgages” where home buyers do not pay off the principal of the loan is also on the rise.
As long as property values increase, all is well with this scenario. The equity in the home improves, so the bank and the borrower both win, and the borrower is enjoying a lower loan payment, by not repaying the principal.
The danger always comes where there is strong loss of property values. Would these borrowers bail out of the loan and the potential loss, of hang on till the market improves?
Australia’s real estate market has always been in a strong position in this area, because of a low unemployment, high immigration, and high fertility rates. The demand for housing is consistently high over a long period. There there is a reported housing shortage. So more people want to buy a home, and there are affordable home for sale.
In fact Australia has the problem of many first home buyers, particularly in Sydney, that are unable to get into the housing market because of high home prices, and that is due to some extent to immigration and to overseas investors,particularly from China, buying homes in the Major Capital Cities.
So any price fall, where it to happen, would be taken up by first home buyers, currently priced out of the market.
Is Australia headed for a housing bubble?
Australian home loan lenders are allowing more borrowers to get into the housing market with lower deposits and lower mortgage payments using discount introductory home loans, and interest only payments, especially in the first few years of the loan.
This lending practice does not seem risky if the borrower has strong income prospects, and can meet the loan repayments, and the housing market is solid. And the previous Labor Government had legislated to give home buyers more security in retaining their homes when faced with difficulty in repaying the home loan. So homes are less likely to come onto the market due to job losses for instance.
Why Australians are more committed to repaying their home loans
In Australia, we do not have “non recourse loans”. So borrowers cannot just walk away from the home loan if the market goes belly up. There is no jingle mail in Australia. This has to help the real estate market as a whole to be more stable. So low deposit home loans are not the problem that maybe seen in housing markets are non recourse home loans are the norm, such as the US.
So a housing bubble, followed by a sudden fall in property values seems an unlikely prospect in the foreseeable future. And we all need a place to live.