The subprime mortgage and financial crisis [more...]
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Housing Finance Market Overview
In Australia, mortgage loans are available to homebuyers mainly from banks and specialist non-depository lenders the "mortgage originators" but also – to a lesser extent – from building societies and credit cooperatives. The Australian financial service industry is dominated by the "big four". Before the financial crisis these four largest Australian banks accounted for around 60 per cent of all mortgage lending. Other banks (mainly foreign or with a regional focus) had a market share of around one quarter.
Although the Australian banking sector fared quite well in the financial crisis, it nevertheless changed the face of the market. The market share of the so called mortgage originators plummeted dramatically from once 15 per cent in the course of the financial crisis to less than 2 per cent as they rely almost exclusively on funding provided by the capital market. But also the market share of banks other than the "big four" was drastically reduced so that the largest four banks had in 2010 a market share of more than 90 per cent.
In fear of negative side-effects of this concentration the government has decided to support the other banks in order to ease their efforts to regain market share.
Mortgage Brokers have an important intermediation role as about 35 per cent of all mortgage transactions were processed through mortgage brokers in 2008. The market for housing finance has seen a strong growth from 2001 to 2008. The ratio of mortgage debt to GDP increased from 54.2 per cent in 2001 to 84.2 per cent in 2008.
The Market from the Perspective of the Demand Side
In Australia, the maximal loan-to-value (LTV) ratio of conventional mortgages equals 80 per cent. Loans exceeding this ratio (up to 100 per cent) usually have to carry Lenders Mortgage Insurance.
In 2008, more than 85 per cent of the granted loans were variable rate loans, so that considerably rising interest rates (like happened in 2010) are of concern for the government.
The Australian government offers subsidies to first home buyers. In 2008, the “First Home Saver Account Scheme” was introduced. Households that save for at least 4 years in order to purchase property will receive a government contribution of 17 per cent on the individual contributions made each year (up to a set maximum). Furthermore, first home buyers are eligible to an upfront subsidy.
House Price Development
House prices increased with an annual average growth rate of 11 per cent from 2000 to 2007. Yet, this average growth rate masks a volatile house price movement. While house prices rose considerably from 2000 to 2003 (in 2002 and 2003 even with almost 20 per cent), they stagnated in 2004 and 2005, before they started to rise again. In 2008 prices declined by -3.9 per cent. The fall in house prices continued in 2009.
The four major banks finance the bulk of their lending through deposits. This applies also to the other banks, building societies and credit cooperatives although they used to securitise a much higher share of their lending (around one quarter) and are in general much more dependent on funding through the capital market. The mortgage originators fund almost all of their lending through securitisation. The market for mortgage-backed securities has experienced difficult times since the beginning of the subprime mortgage and financial crisis as nearly all market buyers for securitised mortgages disappeared. Therefore, the share of the outstanding housing loans that is securitised has dropped from almost 24 per cent in 2007 to around 15 per cent in the beginning of 2009.