Not only is life tough but you try finding a parking spot in a busy shopping centre. Whenever I do I can usually find some place where they could have fitted an extra parking spot. And pretty obviously if theyd have done so I could park there. Well actually I couldnt. If there was an extra parking space, chances are it would be full too and I’d have to keep searching.
The housing affordability crisis is a bit like that. Of course if we can increase the supply of housing then we can all enjoy better housing. But when its in limited supply it has to be rationed. So if we increase the grants people get to buy houses, theyll all bid against each other and end up back where they started. Well actually theyll end up a bit further back than that because the new arrangements involve churning money through government coffers for no good reason and some level of waste is inevitable.
I’m having to remind myself of my parking rage when I think of the growing community anxiety to stop all this predatory lending thats driving people to the wall. You know the story. A comment by Graham Bell on a post on the sub-prime crisis and its implications for prudential supervision raised the issue.
I’m not accusing Graham of anything so heinous, but I cant help thinking of all those Jews sucking the blood out of Europe before Hitler sorted them out.
This idea that progressively laxer and ultimately predatory lending standards is trapping poor Australians – innocent Australians – into the current ‘mortgage stress’ theyre in flies in the face of all the evidence Ive seen in running a mortgage broker. About a year or two into running Peach, Doris gave us a ring. She was a receptionist. She was earning an OK wage I think around $35,000 a year gross and she was single. If I had been in her position I’d probably have been living in a group house and saving more of my pennies. But I wasnt in her position. She had been working and renting in the previous five years and was paying had paid throughout her tenancy around 50% of her income in rent. She had a deposit and wanted to borrow to buy a house. If you recall at the time rental yields in less posh areas were around seven or eight per cent which meant that she could finance the repayments on the mortgage for substantially less than the rent.
Being an economist, I had a naive faith that even though this wasnt normal, it shouldnt be too hard to persuade a lender to lend to her. Peach’s more prosaic General Manager was not impressed with my impression and convinced me that I was wrong. I guess I shouldnt have been that surprised. I already knew that despite a spotless twenty year credit history and plenty of equity, I couldnt refinance my existing home mortgage. Because you see, having started a new business, I couldnt afford the repayments. That is I couldnt demonstrate current income sufficient to do so. I was happy if the bank took my house if I fell behind on payments, but no such luck. There were no takers despite the obvious stupidity of the situation – my existing bank never did any reviews of my ability to repay the loan.
Now theres an urban myth out there that says that lending has become much more cavalier since then. But its only slightly true. Serviceability formulas of at least some lenders have become a little more permissive and rightly so given reduced economic volatility and even more reduced volatility of interest rates. But only a little. It is true that acceptable loan to valuation ratios (LVRs) have risen (from 95% to 100% and higher if you want to pay much higher interest rates). However thats because of increasing appetite for risk (or more probably a reduced assessment of the actual risks involved) from mortgage insurers. And since lenders are the main risk takers here, they wont lend unless the whole package is serviceable.
And despite what youve heard, even today, lenders against residential mortgages remain an overwhelmingly conservative bunch. They move very slowly and typically no-one is out there innovating with any great gusto. They tend to move pretty much together defining industry practice (the practice to which they might be held accountable if someone defaults on a loan and a consumer lawyer argues that the loan was predatory and so unenforceable.)
Theres an obvious reason lenders are conservative like government regulators, theres much less upside from making a good judgement (just the 2% margin on the interest) than there is downside from getting it wrong (where you can lose 10 or 20% of your capital without too much trouble).
And theres government regulation. The Uniform Consumer Credit Code (UCCC) makes loans that people can’t afford unenforceable unless they are for investment. But if you think that the regulation is the main reason for the conservatism – think again. Lenders are actually more conservative lending for investment (where it’s pretty impossible to get an LVR over 95%) than they are for owner occupation even though the UCCC requirements on serviceability only cover the former.
For all these reasons theres very little risk taking or predatory lending against residential mortgages amongst Australian lenders. Still, Graham Bell says this:
Quite a few of those who become victims of low-doc loans could well be true dropkicks and absolute dills, real born losers, but the rest are both impoverished and very ambitious . a very dangerous combination in our troubled times. Do you imagine that some very nasty groups would neglect to seek out willing recruits from among those who have lost everything?
Sorry but your present discussion, necessary and interesting though it is, seems to me to be like rearranging the deck-chairs on the Titanic when there is a far more urgent and potentially hazardous issue to be tackled.
I wonder if Graham has tried to take out a low-doc loan – that is a loan on which income is not fully documented. Firstly most of them have rates that are only about half a per cent above the discount rates available on fully documented loans. Secondly they are generally difficult to get without substantially more equity than those on full doc loans. Over 80% LVR and your cost of money rises sharply and 90% the market is getting seriously expensive and thin. Thirdly low-docs loans are still subject to the UCCC. The lender certifies their own income and if the amount they certify wont service, the UCCC makes the loan unenforceable if the borrower defaults ie it makes it commercially unviable (the spellchecker thinks ‘unviable’ means ‘enviable’ which gives you some idea of how widespread this moral panic is!). Anyway this kind of lending represents 15% of the market in Australia and about the same in the US where its not called sub-prime but Alt A sounds like a keypad shortcut. (If I press Alt-A in Word the table menu drops down but I digress . . .)
There are also no-doc loans. It beats me as to why theyre more expensive when low-doc lenders can lie about their income and if no-doc lenders come with plenty of equity. But there you go. They are. And theyre expensive at 80% LVRs and virtually impossible to get at LVRs over 85%.
These are sometimes classed with low docs and sometimes with non-conforming loans. Non-conforming loans tend to be Australias equivalent of what the Americans call sub-prime loans. I used to think that banks overdid their abhorrence for those with credit defaults Ive certainly fallen for some sob-stories. Or perhaps they were legit. Stories of people living in group houses and moving out and finding that the people whod moved in had made overseas calls on their telephone accounts etc etc. Quite small defaults. Anyway, a recent study suggests that those with blemished credit records are five times more likely to default again which doesnt seem so surprising.
In any event, non-conforming loans are expensive and account for around 1 per cent of our home loan market as opposed to the market share of sub-prime loans in the States of around 15%!
So when I think of whats happened in the market for housing loans I think back to that empty parking space the one that would be handy if it were there, but which, if it were there would still have a car parked in it.
What has happened is that as money becomes available, people find themselves effectively bidding their own borrowing capacity against that of their neighbours. And so people with similar incomes each compete with others of similar incomes (or of lower incomes and higher risk appetites and/or stronger desires to consume now rather than later).
So those parking spaces are filling up and people are feeling the pinch. There is an interesting case one might make that we could all do ourselves a favour by rationing credit. Ive not read or thought much about it, but the argument would be that competing against each other for houses is like standing up to get a better view at the footy. In the end everyone stands up and everyone is worse off. A decent model would bring out the ways in which that analogy is revealing and ways in which it misleads.
But a moments thought would show the political impossibility of re-imposing credit rationing, of governments interposing themselves between willing lenders and willing borrowers and effectively robbing people of the ability to become home owners. For while credit rationing would help lots of people who have got a good sized deposit (by keeping down the price of houses), all those without such a deposit would be the ones from which the government confiscates the Australian dream. I dont think so.
Its so much easier to let off a bit of steam against those evil, bloodsucking moneylenders who are driving us all to our doom, and to call for community action regulation to stop this cancerous evil.