A repeat of the housing market meltdown in the United States is unlikely to occur in other markets, including Australia, a senior Reserve Bank of Australia official says.
National house prices have fallen about 5 per cent over the past year in Australia.
The head of the RBA’s financial stability department, Luci Ellis, said that in most countries mortgage distress increased during economic downturns.
“It doesn’t usually precipitate them,” Dr Ellis said in a speech at a Financial Markets Conference in Atlanta yesterday.
The comments should help ease concerns about the potential bursting of a housing bubble in Australia, barring an unforeseen negative economic shock that drags the property market down with it.
US house prices have fallen about 30 per cent since 2007.
While Australian property prices rose during the crisis, they have since fallen.
Unlike Australia, Dr Ellis said, the United States had some unique characteristics that enabled the meltdown.
The oversupply of housing due to a construction boom and a failure of regulators to address an easing in lending standards, were two of the four key factors in the US.
A range of tax and legal factors, including interest-only loans, meant loan-to-valuation ratios that were high at origination, stayed high well into the life of the loan.
“American households are less likely to pay their mortgages down ahead of schedule than Australians,” she said.
“Trade-up buyers seem to have high loan-to-valuation ratios in the United States; that doesn’t appear to be true in Australia.
“The result of all this is that the US housing stock is far more leveraged than that in Australia, even during the boom period.”
Dr Ellis also noted that prudential and consumer regulation in the US failed to address a greater easing in lending standards than occurred elsewhere. “And they eased in a way that exacerbated the tendency of mortgage borrowers to default in a bust,” Dr Ellis said.
Flexible labour markets and limited welfare systems also contributed to people’s ability to repay loans, she said.
