The endless debate on whether Australia is experiencing a housing bubble continues, but one University of New South Wales Business School Professor has warned that we’re repeating the same mistakes that led to the American housing market crash. Professor Richard Holden has warned that imprudent lending and borrowing is showing ‘very troubling markers’ and is similar to the period preceding the US housing market crash.
High lending rates
Of serious concern is the fact that a mortgage in Australia is worth 25% more than it now is in America for those with the same income level. While this means that Australians are able to borrow more, it also significantly increases the chances that they will be unable to pay for the borrowing they are taking out.
Interest only loans
Professor Holden has also warned that mortgages in Australia are being offered in a ‘risky’ manner. He points to Australian Prudential Regulation Authority figures that show that 34.5% of home loans are being offered as interest-only loans. While interest-only loans are usually offered for five years, it is becoming more difficult to extend these terms and repayments are likely to soar when the five-year term expires. This massively increases the risk of homeowners being suddenly unable to afford their property and going into foreclosure.
One key factor in the US housing market crash was that people were unable to maintain rates after five-year terms ended and were hit with huge increases in financial pressure. As this happened on a large scale, many properties were forced into foreclosure and the sudden uptick in property availability meant that house values dropped to compound the problem. Australia is heading towards the same crisis if the 34.5% of interest-only mortgages are driven to foreclosure.
Another concern for the Australian housing market is that the high 20% requirement for a deposit is being met by many with personal loans. Taking personal loans to meet the deposit requirements compounds the debts that people have to deal with and weakens the financial position of individuals. With additional debts on top of the mortgage repayments, finances in Australian homes are tighter and will be less able to handle changes in interest rates once five-year terms have ended. These personal loans are also unsecured, meaning that if the property is lost through foreclosure these individuals will still have to repay the personal debts while trying to recover from losing their home.
Housing bubble or not, we’re repeating mistakes
Regardless of whether there is a housing bubble or not, mortgage lenders and borrowers are taking risks that are reminiscent of the US housing market crash. Professor Holden points out that indebted households have nearly $2 of debt for every $1 of GDP. This comes at a time when Australians are facing stagnant wage growth. The hallmarks of a housing market crash are visible, but bankers and lenders are continuing with risky lending processes that could cause the housing market to collapse in the same manner that we saw in America.