housing prices howards shame, page-6

When an economy is deregulated and then run efficiently there are some unintended consequences.

Fiscal discipline meant that short term interest rates including interest rate dropped by 50%. With constant income inputs this means that on a 25 year loan borrowing capacity increases by 100%. This was compounded when the 250 basis point margin over cost of funds used by the big 4 banks was reduced to 125 basis points under competition from mortgage originators such as Aussie Home Loans.

There are no restrictions in a floating currency economy [introduced by Paul Keating] on capital flows.

Securitised residential mortgage pools pioneered by Macquarie Bank allowed overseas investors to supply funding to the home market eliminating the restriction caused by the bank balance sheets.

Increased borrowing capacity and unlimited funding - guess what happens to home prices. They rise to the borrowing limit - an increase of 100%. Eventually the economy causes inflationary pressures and interest rate rises occur so prices fall.

The complication is the investor market which attracted too much margined money and as calls are made on this market certain investors who used their house as primary collateral will be pressured.