RBA believes cheap home loans are safe
March 26, 2009
Australia is unlikely to suffer the same economic consequences as the United States, where people rushing into cheap home loans ran into trouble when interest rates started rising.
Lending standards had tightened in Australia during the past 18 months and there had been a significant shrinkage in so-called low-doc and non-conforming mortgages, the Reserve Bank of Australia (RBA) said.
Those loans are the nearest product Australia has to US sub-prime mortgages, offered to Americans who couldn't afford to repay them once interest rates started to rise.
The result was the eventual collapse of the US home loan market.
The RBA has cut its official cash rate by 400 basis points since September last year to a 45-year low of 3.25 per cent, while the standard variable interest rate on mortgages has dropped about 375 basis points.
The federal government has also increased temporarily the first home owners grant, hoping to stimulate the housing sector.
"It is quite clear that purchase affordability has recently improved," the bank's head economic analysis Anthony Richards told the 4th Annual Housing Congress in Sydney.
House prices fell about three per cent in 2008, while auction clearance rates for Sydney and Melbourne have shown a significant pick-up in early 2009.
"So one question that we should ask is whether a period of quite low mortgage rates in Australia could lead to the type of problems that are being seen in the United States," Mr Richards said.
"I think there are good reasons to think this is not a major risk."
Nevertheless, he warned people considering entering the market to carefully consider their own circumstances and whether they could service a mortgage once rates started increasing.
Official data shows the proportion of home lending to first time home buyers is at record highs, encouraged by cheaper home loans and the more generous first home owners grant.
The grant has doubled to $14,000 for those buying existing homes and to $21,000 for new properties as part of last year's $10.4 billion economic stimulus package.
The offer runs out in June and the government has said it cannot guarantee its extension in the May budget.
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