Home Loan Rate – Australia

Predicting the future of the property market is always fraught with risk, but the current global financial crisis is making the task virtually impossible.

The Australian media are full of conflicting opinions from property experts on where the market is headed, making it even harder for the average home owner or investor to plan for the future. Real estate markets in most parts of the USA have taken a hammering over the last two years, and the big question in Australia is: Will the same thing happen here?

On the positive side, there are several crucial differences between the US and Australian property markets:

Housing Supply

Many areas of the US housing market such as Phoenix Arizona are significantly over-supplied with homes. In other words, many more homes were built than each area’s regular demand. The overhang of unsold new properties has been added to by the significant number of foreclosure properties on the market, leading to sometimes dramatic price reductions.

By contrast Australia has, according to property experts, been building fewer homes than the normal demand would dictate. This has primarily been a result of planning restrictions, escalating building costs, and the growing tendency of local government to meet budgetary demands through huge levies on developers rather than increased local taxes/rates for existing homeowners (read: voters).

The resulting shortage of homes is evidenced by the very low vacancy levels in the rental markets in all major cities, accompanied by rising rents. Together with the cost of new homes being significantly higher than the existing housing stock, these factors have underpinned the Australian property market.

Lending Rules

Jingle mail – where homeowners can no longer afford the repayments on their house and mail the keys back to the lender – has become common in the US in recent times. Most (but not all) US mortgages are non-recourse, in that the loan is secured solely against the property and there is no opportunity for the lender to get their hands on the borrower’s income or assets. Once the keys are handed back, the liability of the borrower is essentially over.

This mortgage structure has been at the heart of the sub-prime mortgage crisis – there has been no pressure on the lenders to verify the borrower’s ability to repay the mortgage, and no liability on the part of the borrower to continue repayments if the going gets tough, or a property market correction leads to the home being worth less than the mortgage.

In Australia, the loan liability rests with the borrower, and the lender can pursue the borrower’s income and assets should repayments not be kept up to date. This places much more responsibility on the borrower to organise their affairs to ensure that they can meet their repayments.

Additionally, Australian consumer legislation puts considerable onus on the lender to assess the borrower’s ability to meet their loan obligations prior to approving a mortgage. Over the last 5 or 6 years, low-documentation loans (where the level of loan servicing proof has been lower than for standard mortgages) have grown in popularity, but these are still significantly more secure than the sub-prime loans on the US.

As a result, the mortgage default rate in Australia is only around the 1% mark in 2008, which is about average for the last decade or so.

Other Factors

Other positives for the property market include strong immigration inflows, an economy growing at a significant (albeit slowing) pace, historically low unemployment, and a growing trade surplus.

The Downside

Despite the above positive factors, the outlook for real estate is far from rosy.

The elephant in the room of course is the current global financial crisis. Frozen credit markets and downward-spiralling stock markets do not bode well for any asset class in the near future. Property however, is particularly vulnerable in Australia, with massive mortgage debt a millstone around consumers’ necks. Home affordability is at a record low, as prices over recent years have been ratcheted up by a public which thought price appreciation would go on forever.

And if efforts to loosen up credit both here and overseas do not work – and work soon – it is difficult to see any other outcome than falling house prices. No matter what the demand side of the equation looks like, if you can’t borrow money then you can’t buy a house.

Anecdotal evidence from real estate agents suggests that prices have already started softening in many areas. Whether this softness gains momentum will depend on how the various factors above play out in the coming months.