In Australia, emerging signs of a housing bubble

Banks in Australia are beginning to push interest-only and other exotic loans so people can afford the spiraling cost of homes. Is this the start of a housing bubble?

By , Guest blogger

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    The wooden framework of a new house is seen in suburban Melbourne last month. With housing prices spiraling higher, banks in Australia say buyers need more borrowing options, like interest-only loans, to be able to afford a home. Housing bubble, anyone?
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The Wall Street Journal reports that the median price for a home in major Australian cities just hit A$471,818 (US$394,661), a more than doubling of the median price since early 2002, reports the May 28th edition of Grant’s Interest Rate Observer.

“Revealed: The home loan that could save you a fortune,” writes Nick Gardner for The Daily Telegraph.

When high prices make homes hard to buy, enterprising lenders come to the rescue: remember negative-am, Alt-A, and I-O teaser-rate products circa 2004-2006 in the good old U.S. of A? Don Koch, CEO of Australia’s fifth largest bank, ING Direct, says “There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital or not.” The people of Australia “are needlessly being denied the chance to buy a property while prices spiral out of their reach,” Koch claims. Yes, that whole down-payment and amortization requirement thing was deemed unfair not too long ago in America.

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Koch goes one better, with ING Direct’s new Interest Only Perpetual Mortgage, borrowers can tote their loans from property to property, “accumulating equity from rising property prices as they go.” After all, real estate always goes up in price and ING wants to be your “mortgage partner for life.”

“Then, as they near retirement,” says Koch, “they could sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or they could keep the mortgage going and repay the original capital from their estate, after death.”

A check of the ING website reveals that Mr. Koch started with the company back in 1999 as Head of Technology and CIO. The brief bio makes no mention of Koch having any lending experience. Which may be why he claims, “There is no economic reason for banks to insist on regular capital repayment. It just makes the loan more expensive for the borrower.”

“It has worked fantastically in Europe as a way for people to get home ownership and build wealth throughout their lives. It just requires a change in mindset about how you live with debt,” says Koch.

We know how this story ends.

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