Aussie Mac in the media

Various media reports on Aussie Mac today. The paper is available here. Our press release is over the fold.

Interestingly, in a speech here at the University of Melbourne today, in talking about the government’s reponse to the global financial crisis, the Prime Minister said that:

We will continue to monitor the Australian financial system in light of the current turbulence to ensure that it remains efficient, flexible and competitive – including maintaining competition and choice in the Australian domestic loans market for the benefit of consumers.

This is a good sign.


Federal Government action needed to resolve credit crisis

In a new report published today by MBS’s Centre for Ideas and the Economy, Professor Joshua Gans and Rismark International’s CEO, Christopher Joye, show that the global financial crisis has had major adverse effects on Australia’s securitised mortgage markets. Importantly, Gans and Joye argue that this will result in a significant reduction in competition amongst lenders to the long-term detriment of Australian borrowers and SMEs.

In order to resolve these problems, Gans and Joye propose an innovative policy solution: they argue that the Federal Government should establish a government agency, “AussieMac”, which would-at little-to-no cost to taxpayers-use the Commonwealth’s AAA credit rating to issue very low risk bonds that would then fund the acquisition of high credit quality home loans off Australian lenders. In this way, AussieMac could provide immediate liquidity to the Australian securitisation markets that have been effectively closed by the global credit crunch. Similar government agencies were established decades ago in the US (ie, Freddie Mac and Fannie Mae) and in Canada (ie, the CMHC) where they now provide critical funding for securitising home loans in those countries. Importantly, these overseas agencies do not require any direct taxpayer funding-in fact, they are profitable concerns that support liquidity in private markets.

“Over a decade of intense competition in the Australian home loan industry was enabled by the emergence of liquid securitisation markets, which placed tremendous pressure on the major banks’ margins,” Professor Gans said. “As a result of the US sub-prime crisis, which has nothing to do with the Australian economy, lenders have for the time being lost their ability to securitise low-risk home loans. This makes little sense. As a result of problems overseas, Australia now faces a return to major bank control and higher interest rate margins.”

The report’s co-author, Christopher Joye, notes, “Australian mortgages have the lowest default rates in the developed world, and a fraction of the credit risk of similar US loans. Yet we’ve seen Macquarie Bank and RAMS forced to withdraw from the home loan market while other smaller lenders, such as Adelaide Bank, Challenger, and Suncorp, have had to slash their loan volumes. All of this has occurred because of a foreign crisis that has wrought economic havoc at home. By establishing “AussieMac”, the government could effectively protect Australian borrowers, and the institutions that lend to them, from future financial market shocks without needing to draw on meaningful taxpayer funds. AussieMac would therefore be a liquidity provider of last resort.”

“If the government does not address these problems,” Professor Gans adds, “we face the real possibility that when the Reserve Bank moves to push down interest rates, home lending rates will not always follow. No one wants to see that happen–least of all working families.”

2 thoughts on “Aussie Mac in the media”

  1. As much as their probably need to be some liquidity put in the market to stop a blow up of massive proportions it nevertheless is a bad idea to have the government investing in peoples mortgages. This idea will get used and abused and create a bigger issue longer term. Australia and other countries have experienced excessive credit growth, on the back of securitisation, for a long time now and this has undoubtedly fuelled the property market bubbles here and around the world. Let the market take care of this, you will only delay the pain and create a bigger problem long term. While Australian RMBS are in fantastic shape, this is to be expected in a country that has experienced 16 years of consecutive economic growth. If and when we experience an economic downturn (very shortly), the subsequent bursting of propery bubbles around the country and the RMBS will start to look very ugly indeed.

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  2. George, these statements are very easy to make but very hard to back up with credible facts. In the last 40 years, the worst experience of mortgage default in Australia was about 2% in 1985, which is still only 50% of the current default rates on “prime” US home loans. Furthermore, “real” interest rates in Australia today are still lower than they were in 1995/1996 and less than 50% of their level in the late 1980s and early 1990s. Most now accept that the RBA is coming to near the end of its contractionary interest rate cycle. So there is unlikely to be much more pain for households. Now, of course, default rates will rise. But the doom and gloom picture you paint is most unlikely to materialise.

    I love your comments about a property price bubble. This is the quaint sort of statement that many commentators like to make without any reference to genuine facts. What people tend to forget is that the real house price growth registered in Australia over the last 30-40 years is primarily a function of supply-side constraints (first genuinely identified by the 2003 Prime Minister’s Home Ownership Task Force). As I noted above, the demand-side is not all that bad given where real interest rates are at and the fact that GDP growth is solid with record low unemployment (4%) and the biggest terms of trade and commodities boom in our history (these latter factors are unlikely to change any time soon). But the supply-side conditions will only further deteriorate—there is little new land that is proximate to the major cities, and communities are generally uncomfortable with increasing densities. The bottom line is that supply has driven property returns in the past, and it will play an even bigger role in the future. This is why even conservative forecasters like BIS Shrapnel are saying that we will see 40% growth in prices over the next 5 years (and those guys are always biased towards the downside—they have never got near the true growth rates). Residential property is a “superior good” and we ain’t gonna see that change any time soon. This is one of the reasons why in the last 25 years Australian property has only delivered negative capital gains on 3 occasions—with the worst annual return on record being -2.6% (according to the REIA data).

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