Australias Home Loan Market Since 1980 - Example

Running Headers: AUSTRALIA’S HOME LOAN MARKET SINCE 1980 Title: Australia’s Home Loan Market Since 1980 Name: Course: Institution: Tutor: Date: May 24, 2010 Introduction Majority of investors don’t enter directly into financial markets but use middlemen or intermediaries. The market structure for financial markets is perfect competition. Some of the players in macroeconomics are the commercial banks, pension funds, mutual funds, credit unions, loan and savings association, and insurance companies. When people deposit funds in a bank, the bank uses the money to give loans to home purchasers for mortgages. Apart from mortgages, banks can make loans to anyone for any other purposes. A person who may have extra cash can also seek out borrowers, hence eliminating the intermediaries (Wood and Bushe-Jones, 1990). By eliminating the intermediaries, the saver can obtain a higher return. In the past two decades, the kind of market structure was oligopoly, but many new players have entered into the market recently, and thus why I believe that it is a perfect competitive structure. However, many people like using financial intermediaries because they provide fewer risks when compared to direct lending. Another merit of financial intermediaries is that they provide liquidity to savers. Liquidity is the potential of converting assets into a spendable form, like money. However, economists argue that financial intermediaries can be a background of shocks to the economy, bumps which may interrupt the customary flow of economy life (Beer, 1999). Financial market are supervised or regulated by financial regulation, which poses certain requirements, guidelines and restrictions (Wood and Bushe-Jones, 1989). This might be handled by non-governmental organizations or the governments. The financial regulation endeavors to preserve the integrity of the financial system, enforce applicable laws, license suppliers of financial services, protect clients and inspect complaints, and impeach cases of market delinquency, like insider trading (Daniel, 2008). Deregulation is the simplification of government regulations and rules which hamper the maneuver of market forces. Most people may think that deregulation means to eliminate laws against fraud, but it means to trim down government control of how business is maneuvered, thereby creating a room for free market (Inc Icon Group International, 2008). Deregulation is distinct from liberalization, where many competitors enter in the market, but prolongs the regulation and assurance of purchaser rights and minimum and maximum prices, (Daniel, 2008). Innovation is a process whereby an invention or idea is translated into a service or good for which people will pay. In order to be called an innovation, an idea has to be replicable at an economical cost and gratify a specific necessity. Innovation includes deliberate application of imagination, information, and initiative in deriving superior value from resources and includes entire procedures by which fresh ideas are generated and transformed into useful merchandise. Generally, innovation is an outcome of the application of a technical or a scientific idea in reducing the gap betwixt the necessities or expectations of the clients and the performance of a firm’s merchandises. On other hand, prudential is a regulation of deposit-taking financial markets and supervision. The conduct of financial markets is supervised and poses requirements which limit their risk-taking (Beer, 1999). The objective of prudential regulation is to guarantee the safety of depositors’ riches and sustain the stability of the financial structure (Daniel, 2010). Macroeconomic background The economy of Australian accounts for approximate one percent of total global GDP. The Australian economy is one of the most triumphant of the developed economies in present years and has developed at an average rate of 4% per annum in the last decade. Since the begging of the 1980s, the interest rates have more than halved in Australia and the inflation has sustained modest and unemployment has been reducing. In 2004, the output was approximated at A$835 billion (equivalent to US$650) and GDP per head at US$29,000 in PPP terms. Demographics In 2003, the Australia population was approximated at just fewer than 20 million, which is about 0.3% of the globe population. The population is ageing; in 2001, the medium age 35 years when compared in 1996, where age was 34 years. An assessment of the 1996 and 2001 census indicated that proportion in the youngest is shrinking whereas the oldest age group is increasing. In September 2004, the total number of households in Australia was approximated at 7.8 million, and in 2001, the census data indicates the average household volume at 2.6. The global household sizes are reducing; this is noted from 1971 data that shows an average household sizes of 3.3 and in 1996, it decreased to 2.7 as the proportion of lone person households raised form 22.1% to 22.9% (Breunig and Menezes, 2008). Housing market For many years, housing sector has been a perfect example of a number of market failures. A lot of economist believes that many people have failed to operate efficiently, therefore resulting to failure. Housing stock is made up of various varieties, of distinct types, such as flats, maisonettes, houses, bungalows or tenures (Wood and Bushe-Jones, 1990). Majority of people around the globe are not able to buy this stock due to extreme high price. Few people who manage to own this stock normally purchases through loans. The world economic crisis has hit all sectors including housing, and as a result, bank interests have gone higher. This has also caused the house rent to increase, hence making many families to live in sub-standard accommodation or being homeless. A foremost public sector worker can’t afford to dwell near to his/her work place, and private companies being unable to hire professional staff (Breunig and Menezes, 2008). There are several causes of housing market failure; some of them are homelessness, empty housing, poor quality housing, benefit dependency, market failure and inefficiency in housing transactions, geographical immobility of labor and many more. However, the government has played a key role of ensuring housing market aren’t failing. Government has intervened in housing market in various ways, such as registration regarding to houses building on greenbelt land, government subsidies for houses building, provision of council houses, maximum price, solving black market problem, putting polices that decrease speculation in the housing market, stamp duty, and many more (Inc Icon Group International, 2008). In 2004, the total number of occupied personal dwellings was approximated to be 7.7 million. In 2001, the owner occupation was about 66.2%, where 40% of these dwellers own their homes outright. The private rental accommodation was about 25% of tenure and 5% of social rental. The rates of owner occupation based on households, without including occupied dwellings, are faintly higher at 68.5%. Majority of higher home ownership is occupied by older age group, but ownership of other ages starting from 25 to 44 years has been declining since mid 1980s. On average, approximate 145,000 homes were established in the past decades including a trough in 1996 (Beer, 1999). From the period that construction levels raised by becoming stronger, thus reflecting a strong housing demand from buy to let purchasers and owner-occupiers. Within the same episode, the total number of dwellings rose at an average rate of 1.7% every year, whereas the number of households increased by 1.6%. From the mid 1990s, the prices of house in Australia have been thriving with an average annual growth rate of 8% over the last years. In 2003, this situation resulted about 20%, but currently there are sign of decreasing. This development in housing market is essentially beyond the general rate of inflation, as well as the growth in household incomes (Inc Icon Group International, 2008). Increased demand has fuelled house price inflation and it has been caused by low mortgage rates that decreased from 15% at the end of 1990 to almost 7% at the end of 2004. Moreover, fierce competition between intermediaries has resulted to a decrease in loan rates. Also, Australia has discovered a huge increase in investment in second properties for leasing, which raises more pressure on demand and consequently prices (Daniel, 2008). Housing finance In Australia, the total residential mortgage debt to GDP has been increasing extremely over the last 10 years. In 2004, the ratio was about 73.6% when compared with 1995, where it was 35.4%. This makes a total of about 45% when compared to the EU ratio and 70% to the US ratio. At the end of November 2004, the entire value of outstanding mortgage loans in Australia was about A$614 billion, which is the same as US$ 480billion (Breunig and Menezes, 2008). The dept value of the mortgage outstanding rose at an average rate of about 15% annually or by a total of 220% in the last ten years. In 1993, the general household dept as a proportion of household non-refundable income rose from 73% to about 134% a decade later. This amount is higher when compared for America that 116%, but still at the back of the most indebted European nation; that is Netherlands having 196%. In 2004, the dept of housing accounts for almost 83% of total household dept in Australia and the average housing mortgage dept per household was approximated at almost A$76,000, equivalent to US$60,000, when compared to earlier years which was only A$25,000 equivalent to US$19,400. As prices increases, the affordability has been deteriorating. In 2003, interest that is paid on mortgage accounted for almost 6.4% of income that is disposable compared in 1993 that was 4.4% (Inc Icon Group International, 2008). Below is the structure and the pricing mortgage market (graph) of Australia which was caused by financial deregulation that started slowly in the 1970s, but accelerated piercingly in the early 1980s: Scrounging for owner occupation contributes for majority residential mortgage lending; however there have been an important development in buy to let scrounging in the past decades. At present, the dept mortgage for investment in housing is almost 30% of the entire stock of housing loans, when made comparison with almost 18% over the last decades (Daniel, 2010). The growth average rate of this form of borrowing within the past decades is more than 20% when compared to almost 13% for borrowing for the aim of owner occupation. In 2004, the commitments of mortgage rose muscularly throughout the 1990s and are approximated to have attained a record of A$120 billion, equivalent to US$93 billion. Loans and refinancing for investment have actually contributed a lot to this achievement. Refinancing contributed above a quarter of lending in 2004, when compared in 1992, where it was less the 10%. Equity withdraw is also very vital in Australia, increasing consistently and together with the increase in real house prices, it risen since the mid 1990s. Finance availability has also been a significant factor that has led the development of leading for investment in property. Current, many players have come out with various strategies in order to compete with their rivals. There are some who gives loans with low interest, long duration of re-payment and unsecured loans. If I was a manager of home loan in 2007, I could have provided loan with low interest and unsecured loan. This is because many people are willingly to own home but they don’t have any security for borrowing loans, but I provide low interest that has a long duration of re-payment, many borrowers would be attracted, hence enabling me to compete against other players. Below is 30 year fixed rate monthly averages bar graph: The market has grown to provide this by eliminating interest rate penalties and providing low-equity and interest merely loans that are readily available. Competition has resulted to merchandise innovation like flexible loans, 100% and more, and self-certification loans that have assisted the market to develop. Below is graph that shows housing loan interest rate: Another innovation is deposit bonds that have assisted those getting into the property market by decreasing the preliminary outlay (Daniel, 2010). Through this system, an insurance company assures that the deposit will be paid at finishing point, but not exchange, thereby removing the necessity for the buyer to raise an advance deposit. Majority of loans are more than 80% LTV (but not higher than 95%) have mortgage indemnity which then covers the entire value of the house (Daniel, 2008). Prudential regulation need loans more than 80% to have insurance if they have to succeed for the concessional capital satisfactoriness requirements for housing loans on the lenders balance sheets. Usually, the loan term is 25 years. From 1996, the number of companies giving mortgage loans has rose by almost 50% to 140; however the market is held by the largest intermediaries, which is commercial banks with 70%, followed by building societies with 4%, credit unions with 6%, and securitization with almost 20% (Breunig and Menezes, 2008). Below is a summary data of Australia from 1994 to 2004: Summary data of Australia from 1994 to 2004 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 Real GDP growth 3.6% 3.0% 3.8% 2.5% 3.2% 4.3% 5.2% 3.9% 4.3% 3.5% 4.9% Unemployment rate 5.7% 6.1% 6.4% 6.8% 6.3% 6.9% 7.7% 8.2% 8.2% 8.2% 9.4% Consumer price inflation 2.8% 2.8% 3.0% 4.4% 4.5% 1.5% 0.9% 0.3% 2.6% 4.6% 1.9% Residential mortgage debt outstanding, A$ billion 614.5 539.8 448.1 384.4 330.3 280.5 243.4 216.1 192.0 172.3 152.9 Residential dept/GDP ratio 73.6% 69.2% 60.9% 55.5% 50.7% 46.3% 42.2% 39.6% 37.1% 35.4% 33.2% Residential mortgage dept per household A$ 79,223 70,422 59,390 51,736 45,194 39,023 34,427 31,038 28,089 25,655 23,127 No households, millions 7.8 7.7 7.5 7.4 7.3 7.2 7.1 7.0 6.8 6.7 6.6 Home ownership rate 68.528,089 67.828,089 House price index (1990=100) 249.7 228.3 193.2 163.8 147.2 135.9 126.8 118.1 113.5 112.7 111.3 Annual house price growth 8.2% 18.2% 18.0% 11.2% 8.3% 7.2% 7.4% 4.0% 0.8% 1.2% 3.6% Typical; LTV 62.5% 58.1% 60.9% 61.8% 58.6% 68.6% 67.6% 64.9% 63.2% 63.7% 59.0% Number of private dwellings, 000s 7,754 7,625 7,498 7,498 7,072 7,127 7,015 6,910 6,762 6,668 6,579 Housing starts (000s) 167,535 163,580 170,140 133,948 141,797 152,145 146, 160 135,163 116,486 131,011 179,557 Mortgage interest rates 7.0% 6.5% 6.3% 6.7% 7.6% 6.5% 6.6% 7.2% 9.6% 10.3% 8.9% Refinance share 26.9% 25.2% 21.8% 19.0% 18.8% 15.3% 16.7% 18.7% 21.3% 17.2% 13.2% Conclusion The lone for home in Australia have been decreasing due to high increase of intermediaries, equity withdraw, financial availability, and many more (Daniel, 2010). The commercial banks are the most used intermediaries by people in Australia. However, the total residential mortgage debt to GDP has been increasing extremely over the last 10 years. Higher dept has also been contributed by the global economic crises. This is because many people cannot afford to purchase home, and that’s why they borrow loans in order to acquire homes (Breunig and Menezes, 2008). References Andrew Beer, Housing Investment and the Private Rental Sector in Australia: Urban Stud, Feb 1999; 36: 255 - 269. Gavin A. Wood and Shane Bushe-Jones, Financial Deregulation and Access to Home Ownership in Australia: Urban Stud, Aug 1990; 27: 583 - 590. Gavin A. Wood and Shane Bushe-Jones, Financial deregulation and access to home ownership in Australia. New York: Murdoch University, 1989. ISBN0869051547, 9780869051542. Inc Icon Group International, Deregulation: Webster's Facts and Phrases, London: ICON Group International, Inc., 2008. ISBN0546652743, 9780546652741. John Daniel, A fixed-rate loan prepayment model for Australian mortgages: Australian Journal of Management, Apr 2010; 35: 99 – 112. John Daniel, A Variable-Rate Loan-Prepayment Model for Australian Mortgages: Australian Journal of Management, Dec 2008; 33: 277 - 305. Robert Breunig and Flavio Menezes, Empirical Approaches For Identifying Maverick Firms: An Application To Mortgage Providers In Australia: Journal of Competition Law and Economics, Sep 2008; 4: 811 - 836. Read More