Monday, September 29, 2008

Why $4 billion spent buying Australian mortgages is government money will spent

And why it's good Australian politics as well

Commentator Michael S wrote

"Sorry Peter, but this is a terrible idea. I don't know how you could support it. All that will result is even higher house prices, and people requiring even more complicated financing arrangements (such as Rismark's equity finance mortgages - hmm ... who is associated with Rismark?) to buy places for living.

Anyone who supports this actively wants affordability to decrease."

Commentator Darren Lewin-Hill asked the same question more politely.

So, why is $4 billion spent buying Australian mortgages government money will spent?

Australian mortgages should be cheap to fund. Strewth, they should be. The loans are nearly always repaid on time in full...

Foreign lenders used to recognise this. That was when they were eager to lend and when they believed what ratings agencies told them (which in the case of Australian mortgages was the truth).

Aussie, RAMS, The Adelaide Bank et al got access to this money and exposed Australia's big banks to real competition. So much so that from 1996 Westpac et al began to cut their margins of their own accord in order to hang on to their mortgage business.

The result was cheaper home loans - and less unearned margin accruing to the banks.

Call it economic efficiency if you like, call it real competition, call it the market working, it was good for just about everyone - except perhaps the Westpacs of this world.

Move forward 12 years and because foreign lenders no longer trust the ratings agencies and because they wrongly assume that Australian mortgages are low quality they no longer lend, or demand a fortune for doing so.

Aussie, Rams, The Adelaide Bank et al are virtually out of the mortgage business. And guess what - for the first time in more than 12 years the big banks have widened their mortgage margins.

They will keep them wide until competition returns.

What's needed? Medium term Joye and Gans propose an Australian government body essentially certifying that Australian mortgages are of good quality (which they are) and taking upon itself the very tiny risk that they are not.

The foreign money should flow more cheaply, restoring the competition that will stop Westpac et al from ripping us off.

Short-term they suggest the Australian government, through the Office of Asset Management, buying mortgages from Aussie and so on itselelf. They are of good quality. The government knows that. It will do well on the deal, and force Westpac et al to act competitively.

Competition and the keen prices it brings matter.

Michael S says that Christopher Joye's company will benefit. So what?

What's important is whether it is good policy. It is. It'll restart competition in the mortgage business, with big benefits for bank customers and political ones for the Rudd government down the track.

Michael S also says that cheaper mortgages will result in higher house prices. All other things equal, of course they will. But do we really not want keenly priced mortgages?

There are better ways of taking pressure of house prices than expensive mortgages - scrapping the 50% tax holiday on income from capital gains made from trading property would be start.