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Category: Housing Industry / Banking / Consumer Finance / Consumer Protection / Regulation / Business, Economics and Finance

Australian banks must learn lessons of sub-prime, warns ASIC boss

09:21 UTC+8 April 4, 2017 | Andrew Robertson

An advertisement for a reduced price is seen outside of a home for sale in Dallas, Texas September 24, 2009. (Reuters: Jessica Rinaldi)

The chief corporate regulator has warned Australia needs to learn the lessons of the 2007 US housing crash, which was triggered by sub-prime loans.

Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft issued the warning as new data showed dwelling prices continuing to soar in Sydney and Melbourne.

Mr Medcraft said ASIC is worried about a surge in interest-only loans to property buyers — both investors and owner occupiers.

"If your repayment is lower because you're only paying interest and you ignore the fact that you will eventually need to pay the principal, that is a concern if you can't afford it," he told ABC News.

"We don't want to see that people have put themselves in over their heads, and when rates rise they can't afford to pay their mortgage."

Mr Medcraft said a big concern was the potential double jeopardy of a person defaulting on their home loan because of rising interest rates and then being forced to sell into a market where house prices were falling.

Edge of a cliff? Housing in 2017


There are plenty of forecasts around the Australian housing market in 2017 - and few are positive.

To try and avoid this scenario, ASIC is warning home lenders it will be paying close attention to the living expense calculations being used to assess home-loan applications.

An ASIC survey two years ago showed 40 per cent of home-loan applications included an inadequate calculation for living expenses.

That is, living expenses were unrealistically low.

"Lenders have an obligation to act responsibly," Mr Medcraft said.

"They must look at adequate living expenses compared to a more realistic interest rate over the longer term to make sure the mortgage doesn't default.

"It's in everybody's best interest."

Medcraft was in US when mortgage crash unfolded

Mr Medcraft has firsthand experience of how a housing market can go pear-shaped.

He was head of securitisation at French bank Societe Generale, working in the US, as the sub-prime mortgage crash unfolded, leading to the global financial crisis.

While comparisons between Australia and the US are not strictly apples for apples, the rise in interest-only loans is an indication that many people are buying properties they cannot really afford. Just like the US a decade ago.

ASIC's focus on interest-only loans follows the banking regulator APRA's latest attempt to rein them in.

APRA has told banks to lower the proportion of interest-only loans to less than 30 per cent of home lending. Currently it is around 40 per cent.

The Treasurer has also weighed in, noting household debt is now running at an historic high of 125 per cent of gross domestic product.

"In a time when interest rates are low, what you want to be doing is paying down your principal," Scott Morrison said.

"You want to be reducing your principal on your debt."

AustraliaPlus


 

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