It seems that some people haven’t yet learnt any lessons from the US property crash. Years of easy credit, encouraged by “no money down” finance, dubious lending practices (and ably assisted by the US government, which encouraged people to buy homes who never should have) led to a rapid appreciation in home prices. In 2007, the music finally stopped and in some areas, such as Las Vegas, and parts of Florida, homes dropped in price by as much as 50%.

There are differences between what happened in the US in the run-up to 2007 and the recent housing boom enveloping Australia. For a start, some (not all, as is often incorrectly reported) US states have non-recourse finance, which allows borrowers to simply walk away from their homes (Australian loans are almost always full recourse).

Further, Australian lenders in general have been less generous with finance as the US counterparts (adjustable rate mortgages, with teaser rates, which start low and dramatically increase after several years,  are uncommon in Australia but occurred more in the US), a swathe of mortgage lending has allowed Australian house prices to rocket at a rate far higher than inflation or economic growth, especially since the most recent boom began in 1998. This has seen Australia’s mortgage debt-GDP ratio rocked from about 20% to more than 90% in the past decade.

But it appears though that not everyone is happy with the minimal amounts of restraint shown by Australian lenders, especially a tip writer to Crikey on Monday. The anonymous tipster claimed:

Can someone explain to me why I as a 50-year-old with super, death and disability insurance, no debts, a $20,000 deposit and a combined income with my partner of $75,000 am I denied a home loan of $200,000 because I am 50?

Let me explain.

For a start, the tipster is trying to purchase a property with only a 10% deposit. That is a very small deposit. The fact that the tipster is 50 isn’t of especially major relevance, other than to emphasise that they would appear to be a truly terrible credit risk if they have worked for three decades and have managed to save only $20,000. Historically, Australian lenders would require a 30% deposit, so traditionally, the tipster would have needed at a deposit of more than $60,000 to buy a property.

While Australian lenders have become more willing to lower deposit requirements in the past 30 years (in some cases, extending a loan for 105% of the property price to cover incidental costs), the reason the tipster isn’t able to get a loan to buy their desired $200,000 property is because most Australian lenders require “mortgage insurance” for borrowers who have less than a 20% deposit. Many (including this writer) argue that even with insurance, there is often still a substantial risk for the lender, for instance, in the event of a widespread collapse in housing prices, it is possible (or even likely) that the insurers themselves may fail (leaving the lenders exposed for the full value of the loan). Further, given the housing appreciation of recent years and current yields, there is a possibility that housing will fall more than 20%, leaving lenders exposed to impairment of their collateral notwithstanding the mortgage insurance.

But back to the tipster — they are effectively aggrieved that the major mortgage insurers (QBE and Suncorp) consider them to be a bad credit risk. Looking objectively, no rational lender or insurer would extend credit to the borrowers such as the tipster if they wanted to remain in business. The tipster clearly is unable to save (given they could only scrape together $20,000 despite having a stated household income of $75,000) — if the tipster or their partner were to lose their job, their household income would make it such that servicing a loan would be virtually impossible.

Given that the tipster is putting down just 10% of the price of the home, should the price drop even marginally, the insurer would face a loss. Like any insurance contract — the person offering the insurance must weigh up the risk involved with the premium paid — if the risk-return matrix is poor, than it would make no commercial sense for the insurer to assume the risk.

Of course, the tipster fell back on the old refrain, “property always goes up”, noting that “my calculations suggest with increased wages and profit from the sale of home and a time when we’d be wanting a smaller abode we’d be quite comfortable”. That is precisely the mistake made by millions of low-income American home buyers, who were able to use their homes as ATMs, refinancing as the price of their home rose.  As soon as property prices stopped rising, many subprime borrowers, especially those with adjustable rate mortgages, were unable to afford repayments as they had been relying on constantly refinancing their properties as the notional price increased.

While the tipster blamed Australia’s nanny state for “having to pay in rent actually more than we’d be paying off on a mortgage” that of course, is not only offensive, but completely wrong. Australia’s credit laws had little or no influence on the tipster not being able to finance their purchase — that was because the tipster had too small a deposit and too low an income. As for the claim that owning a home is cheaper than renting, based on Australia’s median property price and median rental, it costs around twice as much to own your own home, as to rent one.

Peter Fray

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Peter Fray
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