Australia Not at Risk of U.S.-Style Subprime Crisis

By Jacob Greber

March 26 (Bloomberg) -- Australia’s lowest benchmark interest rate in four decades and government grants to first- time home buyers are unlikely to cause a U.S.-style subprime crisis, an official at Australia’s central bank said.

“The past year and a half has seen lending standards tighten in Australia, with a significant shrinkage in the amount of lo-doc and non-conforming lending,” Anthony Richards, head of economic analysis at the Reserve Bank, said in Sydney today. He didn’t address monetary policy.

Concerns have been raised that four percentage points of interest-rate reductions since September and government grants of as much as A$21,000 ($14,700) to first-home buyers could lead to an expansion of lending to riskier borrowers, Richards said. First-time buyers accounted for a record 26.5 percent of dwellings that were financed in January, up from 18.1 percent a year earlier, a report on March 11 showed.

“No doubt some of the loans being written now will turn sour,” Richards told the Fourth Annual Housing Congress today. “However, overall, I suspect that the risk of non-performing loans increasing to the extent seen in the U.S. is low.”

Still, potential buyers “need to carefully consider their own circumstances, including whether they would be able to continue to service their loans if mortgage rates were at some point to begin to return to more normal levels,” he added.

The Australian dollar traded at 69.86 U.S. cents at 9:15 a.m. in Sydney from 69.86 cents just before the speech was released. The two-year government bond yield was unchanged at 3.07 percent. A basis point is 0.01 percentage point.

Mortgage Payments

Reserve Bank of Australia Governor Glenn Stevens lowered the benchmark interest rate to 3.25 percent in February to help stoke an economy that unexpectedly shrank in the fourth quarter for the first time in eight years. Since September, commercial banks have reduced the rate on variable home loans by 375 basis points.

The rate reductions have saved borrowers with an average A$250,000 home loan about A$600 a month. Around 90 percent of property buyers in Australia have variable-rate mortgages.

“It is clear that monetary policy has been effective in lowering borrowing rates in the Australian economy,” Richards said.

By contrast, central banks in other countries have also cut their policy rates by at least as much as the Reserve Bank, but have typically seen much smaller reductions in the actual rates paid by households and businesses, Richards added.

Debt Burden

“The fall in borrowing rates has reduced the debt- servicing burden of the household sector by approximately 5 percent of household disposable income,” he said. “That implies a significant amount of cash flow relief, for spending on other goods and services or to save and/or pay down debt.”

Policy makers left the benchmark rate unchanged this month for the first time in six meetings, saying recent cuts are supporting the economy.

While property prices fell around 3 percent last year, most of the declines were in more expensive suburbs, which have “fallen noticeably,” Richards said. “This presumably reflects the greater exposure of people in higher-priced suburbs to financial developments.”

Richards added that auction clearance rates for Sydney and Melbourne this year have shown “a significant pickup relative to late 2008.”

Government Handouts

Government grants to first-time buyers, the central bank’s rate cuts and lower prices have led to a “significant improvement” in housing affordability for people paying mortgages or contemplating a purchase, he said.

Home-building approvals unexpectedly fell in January for a seventh month, adding to signs the economy is in its first recession since 1991. Gross domestic product shrank 0.5 percent in the fourth quarter from the previous three months.

While “home-building is likely to remain weak in the near term, there are a number of factors which should support activity over the medium term, providing stimulus to the broader economy,” Richards said.

Richards said there may be a need for about 40,000 new dwellings a year to keep rental vacancy rates at “normal levels of around 3 percent,” compared with the current rate of 1.5 percent.

“Whatever the true shortfall of dwellings, we can say with some confidence that our housing market is relatively tight,” he said. That will “‘support homebuilding in the period ahead.”

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