Few Australian home owners face negative equity

Source : Business Times - 16 Apr 2009

Few Australian home borrowers face ‘negative equity’ if property prices fall because tighter lending standards and tax rules encourage households to repay debt faster than in other countries, a central bank official said.

‘Australian households by and large have more of a financial buffer against falls in housing prices than their American counterparts did,’ Luci Ellis, head of the Reserve Bank’s financial stability department, told a conference in Melbourne yesterday.

Australia’s financial system has withstood the shocks of the global financial crisis ‘better than many others’, partly because its housing and mortgage markets did not become as overextended as in the US, Ms Ellis said. The central bank cut borrowing costs last week to a 49-year low of 3 per cent to stoke an economy that is forecast by policymakers to contract this year for the first time in almost two decades.

‘There are signs that Australian banks and other lenders have become more risk-averse and they have tightened lending criteria somewhat,’ Ms Ellis said. ‘However, it appears that good-quality borrowers can still obtain and roll over credit.’ Households and businesses have also become more ‘risk averse’ than in recent years, are saving more, and have cut demand for credit, she said.

Total loans provided by banks and other finance companies were unchanged in February from January, when they rose 0.6 per cent, Reserve Bank of Australia figures showed on March 31. Loans to consumers to buy homes rose 0.6 per cent for an annual gain of 7.1 per cent.

Ms Ellis said that the global economic crisis has triggered debate, inside and outside central banks, on whether monetary policy should be used to respond to concerns about financial stability.

‘But there is also recognition in many quarters that low interest rates were not - and shouldn’t be - enough to cause such a crisis on their own,’ she said, referring to the interest rate cuts that followed the 2001 dotcom bust.

‘A lack of appropriate financial regulation in some countries is widely regarded as one of the important causes of the crisis,’ Ms Ellis said.

A key reason Australia’s housing market was less over-extended was that lending standards did not ease as much as in the US, according to the central bank.

‘Sitting on the other side of the world, it’s easy to lose sight of just how far lending standards did decline in the US mortgage market,’ Ms Ellis said. ‘Low-doc loans exist in Australia, but they are less common.’

Also, because Australians cannot deduct the interest on their home mortgage from their taxable income, as in the US, they are not encouraged to keep their mortgage balances high, she said.

‘Many Australian households pay off more than they have to. In doing so, they accumulate potential redraws that serve both as precautionary saving and an additional buffer of equity against falls in house prices.’