Home-ownership can be a curse, according to Saul Eslake.
In this interesting op-ed in The Age Eslake argues that it wasn’t unregulated markets that caused the sub-prime crisis, it was a misguided desire to increase home ownership by directing banks to fund people into houses who couldn’t really afford them.
One of the means adopted during the Clinton administration to this end was to use the Community Reinvestment Act to require banks and other mortgage lenders to be ”innovative and flexible” in helping households ”that lack cash to buy a home or make the payments” – that is, to loosen their lending requirements.
Another was to add an ”affordable housing” mission to the charters of the government-sponsored mortgage agencies, Fannie Mae and Freddie Mac, which were required by 2007 to show that 55 per cent of their mortgage purchases were loans to low and moderate-income borrowers, of which 25 per cent were to be loans to low and very low-income borrowers. Fulfilling this mandate required Fannie Mae and Freddie Mac to purchase a growing volume of mortgages that did not conform to their traditional requirements.
These undoubtedly well-intended measures prompted a more general lowering of lending standards, as private sector mortgage underwriters came up with ”innovative” products that allowed borrowers to take out larger loans with lower initial payments in an environment of unusually low interest rates, while Wall Street and European investment banks came up with new ways of distributing securities based on these products to a wider investor market.
The Age sub-editor’s Recycle Bin also saw the original last two pars of Saul’s piece which read:
This figure [Australian mortgages 90 days or more in arrears] represents less than half of one per cent of the more than 5Â½ million mortgages outstanding (and less than one-tenth of the corresponding US figure). The ability and willingness of the vast majority of Australian home-buyers to keep up their mortgage repayments is one of the main reasons why Australiaâ€™s experience of the global financial crisis has been much less severe than in Americaâ€™s.
Another important lesson of these contrasting experiences is that if we do genuinely want to improve housing affordability, and sustainably to increase home ownership rates, we need to increase the supply of (affordable) housing, rather than continue to put cash into the hands of buyers irrespective of their means, cash which ultimately ends up in the pockets of vendors.
In other words, the extreme good health of the Australian financial system may be partly because we chose a quasi-market solution and funded purchasers rather than mandating via refulation that banks make loans. While this policy has increased housing prices it hasn’t increased financial risk to the same extent as occurred with different measures in the US.
It may also perversely be partly due to bad management of housing supply. If state and local governments had more rational planning systems, and didn’t hit the development industry with so many upfront taxes, we’d have more housing supply and more defaults and our banks might look more like those in the US.