Australian Central Bank Sees No Case for Loans Rules

By Jacob Greber

Aug. 13 (Bloomberg) -- Australia's central bank says there is no case for permanent government intervention in the mortgage market to boost the availability of credit to borrowers.

``While the availability of finance has tightened up recently, over the longer term we do not expect that a shortage of housing finance will be one of the problems that Australia will have to confront,'' Assistant Governor Philip Lowe said at a financial services forum in Sydney today.

The creation of permanent government structures to increase the supply of credit ``can have unintended consequences,'' Lowe said. Government-chartered Freddie Mac and Fannie Mae, which together own or guarantee 42 percent of the $12 trillion U.S. home loan market, have been battered by record delinquencies and rising losses as they struggle to shore up their balance sheets amid the worst housing slump since the Great Depression.

Australia, which doesn't have a government-backed mortgage lender, has a ``very competitive private mortgage market, which has offered a wider range of mortgage products to consumers than that seen in many other countries,'' Lowe said.

Lowe also said ``there's no obvious reason why'' banks wouldn't pass through any reduction in official interest rates by the central bank. ``Over recent weeks, the 90-bank bill rate has fallen considerably. This is often used as a measure of the cost of funds,'' he said.

An Australian parliamentary committee studying housing affordability said in June that a state-backed lending agency, AussieMac, would be ``beneficial in the Australian market.''

Non-Bank Lenders

Housing affordability is at a record low in Australia because of interest rates at a 12-year high and a 140 percent surge in the median national house price since 1999.

The global credit squeeze has also made it harder for lenders that finance mortgages through the securitization market. ``At current spreads, these lenders face difficulties in making profitable prime housing loans at the rates that the banks are charging for these loans,'' Lowe said.

The proportion of new loans for home buyers sold by so- called ``non-bank lenders'' has fallen from around 13 percent a year ago to just over 4 percent, he said.

That has helped boost the share of loans sold by banks such as Commonwealth Bank of Australia ``significantly,'' he added. Commonwealth Bank, the nation's biggest mortgage lender, said today that second-half profit rose 6 percent to A$2.42 billion ($2.11 billion).

`Escaped the Worst'

``We think the securitization market will return,'' Lowe said. ``The financial market architecture that supported that market is still there. Once conditions settle, we're reasonably confident the securitization market will return and'' and help boost competition among lenders.

Lowe said Australia has ``escaped the worst of the excesses seen in the U.S.'' mortgage market and has loan arrears rates that are ``considerably below comparable figures for many other countries.

Just over 0.4 percent of Australian banks' mortgages are more than 90 days in arrears, compared with 2.2 percent in the U.S. and 1.3 percent in the U.K., Lowe said.

One reason Australia has avoided mortgage-market problems is that ``the big lift in aggregate house prices in Australia took place between 1996 and 2003, prior to that in a number of other countries,'' the assistant governor said.

``It meant that just at the time that financial innovation was accelerating around the world and investors were looking for new higher-yielding assets, Australian households were digesting the big run up in debt and house prices that had occurred earlier in the decade,'' Lowe said.

`Better Shape'

While many Australian households' finances ``are undoubtedly currently strained, the aggregate position of the household sector is in better shape than it would have been had the housing boom run on longer and coincided with these developments in the global system.''

Lowe said there are number of proposals being debated around the world to avoid a repeat of the global credit crunch triggered by the U.S. subprime crisis, including addressing how bonuses are paid to bankers, changing the way assets are valued and making central banks ``lean against a financial boom, particularly if significant debt-financed imbalances are building up in the system.''

Another idea is that financial institutions should build up their capital buffers in the good times, Lowe said.

Increasing reserves would likely reduce the need for banks to raise capital when times are tough, though it may also increase the cost of financial intermediation and ``could distort the competitive position of different institutions in the financial system,'' he said.

```The trade-offs are difficult and the implementation challenges are considerable.

``Despite this, finding ways of dealing with financial cycles is important if we are to maintain the broad community consensus that has supported financial liberalization and globalization over recent decades.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net