The leading cause of the US housing bubble was a privatised and deregulated financial system lending absurd amounts of credit to every Tom, Dick and Harry that would take it, regardless of their financial standing. This gave rise to the term ‘ninja’ loan, borrowers with no income, no job and no assets.
Loose credit was used to speculate on the property market, generating easy profits until the bubble peaked and then collapsed the financial sector in 2008. As early as 2004, the FBI testified before Congress that there was a significant amount of fraud taking place around the banks’ lending to borrowers. These concerns were dismissed by the Bush administration.
Similar to the US, Australia has a deregulated and liberalised financial sector, having undergone numerous reforms during the 1980s and 1990s, ending the government’s heavy involvement in ownership and management during the social democratic period of the 1950s to 1970s. Unsurprisingly, the amount of credit the banking sector extended to all parts of the private sector has increased dramatically. Mortgage debt has more than quadrupled from 19% of GDP in 1990 to 84% in 2012 to a higher level that of the US at its peak.
According to Denise Brailey, the president of the Banking & Finance Consumers Support Association, an organisation dedicated to protecting the public against predatory financiers, there is some evidence to suggest mortgage fraud is far more widespread than previously thought. Having worked in this field for the last 20 years, criminologist Brailey has seen first-hand the financial and social wreckage wrought by a multitude of scams and predatory lending.
Brailey provided testimony before the Senate Economics References Committee alleging wide-scale fraud from banks to brokers. While her testimony, which covers the period of 2008 to the present, was largely about low- and no-doc loans, her claims extend into the mainstream of full-doc mortgages.
Certainly, the public would know more if the ATO, ASIC and APRA bothered to look into these cases of fraud, but just like the US, regulators have been captured by the finance industry, unwilling to upset bankers and their allies in political office. Only time will reveal the extent of fraud that has taken place.
Ryder quotes Stevens about the apparent stability of the house price to income ratio for around a decade. I personally took an interest in the statistics used to construct this ratio, but my data request was refused by the RBA on the grounds of commercial confidentiality. Eventually, I managed to extract the household income part of the equation (denominator) through a Freedom of Information Act, as this had been constructed using ABS data (the numerator was constructed using data from APM).
It was easy to see why Stevens believed the ratio had not changed for 10 years: the RBA measure of household income was severely inflated, to the point that the median household was ‘earning’ $97,000 in early 2010 (the last year that data was provided). This unrealistically high level of household income deflated the ratio.
ABS survey data estimates household income to be no higher than $74,000, a significant difference. Economists Leith van Onselen and Cameron Murray carefully backtracked through the National Accounts data to reveal the extra artifacts that the RBA had inserted into the household income figure to inflate it.
In summary, Australia does share some uncanny similarities with the US in the period before its housing market collapsed. Central bankers denied there was a bubble, the economy was apparently strong, there were never-ending reports of a dwelling shortage, bank lending is at historical levels, housing prices were also historically high, regulators were asleep at the wheel and reports of lending fraud surfaced. A weak economy and high unemployment only occurs after the housing market sinks.
Probably the only aspect of Ryder’s article that is accurate is when the question is asked of why a comparison between Australia is the US is considered legitimate. Ultimately, the most accurate assessment is based upon Australia’s current internal economic conditions. The second-best comparison is between Australia’s current and historical trends. Comparisons with other countries comprise an interesting academic exercise that can tell a useful story, but this is not needed to assess the health of Australia’s property markets.
Philip Soos is a researcher at the School of International and Political Studies at Deakin University. This article first apppeared on Property Observer.
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