Aussie Central Bank on House Prices

Generali

http://www.theage.com.au/opinion/political-news/rba-warns-on-loan-risks-20120821-24kpa.html

NTEREST-ONLY housing loans, and loans for 100 per cent of the property's valuation, could be scrapped in future after the Reserve Bank's annual conference heard that they inflate property booms and busts.

Three papers from key economic institutions found that requiring borrowers to finance part of the purchase themselves would help to moderate future booms - and reduce the scale of the subsequent bust.
Senior officials of the Reserve Bank, the International Monetary Fund and the Bank of International Settlements separately reported that setting maximum loan-to-valuation ratios could help reduce the damage housing cycles cause to the economy.


The Reserve Bank paper, co-written by the head of its financial stability department, Luci Ellis, also found similar benefits from requiring borrowers to pay down the capital of the loan over time, rather than taking out interest-only loans.

As the Aussie banks have escaped the worst of the financial problems that have beset the industry in Europe and the USA, it may well be that Australian regulation is looked at for best practice in future. Or not of course.

For those that can be bothered, here is the RBA's conference discussion paper in all its 30 page glory:

http://www.rba.gov.au/publications/confs/2012/dellariccia.pdf

Graham_Devon

NTEREST-ONLY housing loans, and loans for 100 per cent of the property's valuation, could be scrapped in future after the Reserve Bank's annual conference heard that they inflate property booms and busts.

I like that sentence. Made me think of powerful people saying "you what, really, interest only loans fuel higher prices?!".

Does it take a long time for information to reach Aussie land!?

Generali

Graham_Devon wrote: »

I like that sentence. Made me think of powerful people saying "you what, really, interest only loans fuel higher prices?!".

Does it take a long time for information to reach Aussie land!?

As usual we in the colonies bow to our betters in the Mother Land but I don't recall the BoE, Fed or ECB seriously discussing a document regarding banning 100% and I/O loans.

Aussie banks, as with US and European banks, have long had to hold higher reserves against high LTV mortgages. I think this could be something of a change in the regulatory environment for mortgages in Aus and, as I said in my OP, across the world.

By contrast this paper (link) from the BoE for example touches briefly on the idea that 100% mortgages are a bad idea but quickly moves on (p.17 onwards) to discuss borrowers being able to afford house prices at higher real levels than today by using an 'equity mortgage' where the bank takes a share in the value of your house and gains/suffers with you as prices rise and fall.

For me the difference is that Australian regulators are seriously starting to discuss banning certain types of mortgages.

Generali

In addition, the fraud squad is starting to look at some 'interesting' practices amongst mortgage brokers too:

http://www.abc.net.au/7.30/content/2012/s3566922.htm

Examples include registering a business for a day so that you can be 'self-employed' to get a lo-doc mortgage; mortgage brokers filling and amending financial parts of forms without telling clients and now refusing clients access to their own applications(!); and including HPI as a part of income.

shortchanged_2

But of course Generali we needn't worry in the UK because none of this ever went on over here. :silenced:

Generali

shortchanged wrote: »

But of course Generali we needn't worry in the UK because none of this ever went on over here. :silenced:

To catch people you have to investigate them first of course.

If you have time, there is an excellent book by a left-wing economist called JK Galbraith called The Great Crash which is about the 1929 Wall Street Crash and its aftermath. It is The classic book on the subject.

In it he talks about the 'bezzle' being an amount of economic output that is measured during boom times but which is actually fraud. This only comes to light during the subsequent bust when bankruptcies and foreclosures are investigated and gone through. If there is systematic forbearance of bad debt in place then this bezzle won't come to light.

One of the things that comes out of the ABC report is that it is when people are being repossessed that the lies come out. One woman was told by a call centre, "I don't know why you got in such a mess: you have $750,000 in shares and rental income coming in too". The woman had neither but the broker had stated on her form that she had.

Eellogofusciouhipoppokunu

Generali wrote: »

As the Aussie banks have escaped the worst of the financial problems that have beset the industry in Europe and the USA, it may well be that Australian regulation is looked at for best practice in future.

Its always better to learn from someone else's mistakes as its much cheaper on the pocket.