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 they’d have done so I could park there. Well actually I couldn’t. 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 it’s in limited supply it has to be rationed. So if we increase the grants people get to buy houses, they’ll all bid against each other and end up back where they started. Well actually they’ll 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 that’s 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 can’t 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” they’re in flies in the face of all the evidence I’ve 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 wasn’t in her position. She had been working and renting for the previous five years and was paying - had paid throughout her tenancy - about 50 per cent 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 about 7 or 8 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 wasn’t normal, it shouldn’t 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 shouldn’t have been that surprised. I already knew that despite a spotless 20-year credit history and plenty of equity, I couldn’t refinance my existing home mortgage. Because you see, having started a new business, I couldn’t “afford” the repayments. That is I couldn’t 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 there’s an urban myth out there that says that lending has become much more cavalier since then. But it’s 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 per cent to 100 per cent and higher if you want to pay much higher interest rates). However that’s 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 won’t lend unless the whole package is serviceable.
And despite what you’ve 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).
There’s an obvious reason lenders are conservative - like government regulators, there’s much less upside from making a good judgment (just the 2 per cent margin on the interest) than there is downside from getting it wrong (where you can lose 10 or 20 per cent of your capital without too much trouble).
And there’s 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 per cent) than they are for owner occupation even though the UCCC requirements on serviceability only cover the former.
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