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Mortgage Regulation Australian Style

Submitted by The Idiot Tax

Beauty is clearly in the eye of the beholder. On Saturday, up a rapey alleyway, in the inner-city Sydney suburb of Surrey Hills, first home buyer, Doi, with mother Gina by his side (and a little of Gina's money in his pocket), duked it out with six others at an auction to secure his first home. Doi said of his purchase "it's a beautiful little house." And more on that later. Sadly, like many first home buyers in Australia though, Doi won't be living in his first home. He'll be renovating it before renting it out.

The reason Doi won't suffer the indignity of opening his front door to the sounds of late night alleyway hand jobs is because he, like most first home buyers, likely can't afford to. Something sick and twisted has happened in major Australian cities - first home buyers have no incentive to live in their first home any longer. Because of incentives like negative gearing, an investor will likely put zero down, take an interest only mortgage because the rent still won't cover the costs and claim a tax deduction on the loss at the end of the financial year - the hope is the capital gains will eventually make up for the rental losses.

First home buyers have little chance to compete with this madness. So their response is join the party. Buy something, rent it out and stay at home with the folks. If that's not sick and twisted enough, Doi paid $840,000, $140,000 over the reserve, for his first home (the sick) and it looks like this (the twisted).

A beautiful little house, ain't it? Even a new coat of bright yellow paint to cover up the rust stains. 

63 square metres of the Australian dream. 1 bedroom and an external laundry and bathroom to remind you of colonial times. The good news is, despite Sydney property prices tearing upwards 14% in 2013 and another 12% in 2014, after the Reserve Bank cut interest rates 1.25% in 2012 and another 0.5% in 2013, in February this year, the RBA saw fit to cut another 0.25% into this lunacy without any lending restrictions in place. But this is totally cool because in their words, "the Bank is working with other regulators to assess and contain economic risks that may arise from the housing market."

And what are those other regulators up to? APRA or the Australian Prudential Regulation Authority used all of their authority to write Australia's banks a letter.

APRA’s new mortgage standards focused on quality, not quantity of lending In its letter to the banks, APRA indicated that it will increase the level of supervisory oversight on mortgages given recent developments in the housing and mortgage markets. That said it does not propose to introduce across the board increases in capital requirements or caps on particular types of loans.

The financial terrorists at APRA must be pleased with themselves that they'd managed to write a letter to the banks about their lending standards by December 2014. After the Reserve Bank knocked 2% off interest rates starting in 2012. See if you can pick where the RBA started cutting interest rates and Australian property investors in Sydney and Melbourne (represented by NSW and Victoria on the chart) started getting horny with cheap money and ploughing it into Australia's two largest cities?

I know. It's a total shock that maniacs who borrow nearly 100% on interest only terms to lose rental money to speculate on housing capital gains would love low interest rates. And with the lowest mortgage rates in Australian history, coinciding with the sloppiest lending standards in Australian history, combining with the highest property prices in Australian history, added to the highest household debt to income ratio in Australian history, what would you expect the biggest idiot of a treasurer in Australian history to do? 

Start talking about letting first home buyers raid their retirement accounts, so they can get over the angst of missing out on this lunacy and ensure they'll blow their retirement savings and push the housing market up even further.  

...such changes may include using superannuation savings for things that Australians do not use them for now, he said, including using super to buy first homes. "I get a lot of people approaching me saying that young people should be able to use their superannuation to fund a deposit on a home, on their first home," Mr Hockey said. "I am concerned about rising house prices and the accessibility to homes and homeownership for younger Australians, but we've got a limited pool of savings. We need to have these conversations."

This is innovation Australian style from treasurer, Sloppy Joe Hockey. If it's not enough to dig up resources and sell them to China and then use that money to borrow more money to to bid up house prices no-where-else but Australia. Why diversify? When first home buyers are lucky enough to dodge this bullet (whether they understand it or not) the man who should be offering caution, sympathizes with them by suggesting they should be able to grab their retirement money and jump into the housing market when it's never been hotter.

But as Sloppy Joe says, "I get a lot of people approaching me saying that young people should be able to use their superannuation to fund a deposit on a home, on their first home". Note Sloppy says he gets a lot people saying that young people should be able to use their superannuation, instead of a lot of young people saying that they should be able to use their superannuation. Which is really the key because this dopey plan has been done before in Canada and who came up with it? It wasn't first home buyers, it was the Canadian Real Estate Association, in the midst of a recession and housing down turn. And those guys don't ask for money to flow to the real estate market to help first home buyer affordability. 

If this ain't bad enough, Australia's China fueled boom is all but over. And a guy named Crispen Odey, who likes to have photos taken with his hands clasped together, thinks we're toast. Australia is heading for recession he says. He's dark on the banks, who keep lending to the maniacs who've been bidding up house prices. And he's short on Genworth who does some of their mortgage insurance. The downturn is already being felt in mining towns where formerly hot housing markets have turned to dust in the space of 4 years. 

Will Doi feel a cool breeze at his new inner city shed? Well that's assured. If he wants a bath or needs to take a leak, he has to walk outside to do so, but that's someone else's problem. His tenant. Doi's lucky, if Sydney's looney housing market falls apart, he'll never suffer the indignity of foreclosure, eviction and moving back in with his mother.

Australia's bizarre obsession with real estate speculation meant he never had the opportunity to leave mother's house in the first place.