Apart from our geographic location, there are many actual differences between our Australian banking system and that of the USA banking system, especially pre-GFC. For those who don’t know what the GFC is, it was the Global Financial Crisis. Naturally, this topic is far more complicated than what this short post will contain; however, I’ve also linked a good one of the many explanatory peer-reviewed articles about what happened in America in case you’re unsure of the background.
So what are the three main things that mean we’re safer than America was?
- Our lending market is not deregulated. In fact, it’s so heavily regulated, that there’s less and less wiggle room for lenders to approve new loans every year. The regulation is getting fiercer.
It’s also getting much worse. Why do I say that? Well, let’s just put it this way. Seasoned property investors might remember that last year, the banks started raising interest rates on investment loans. Now I’m not sure if you guys are aware, but the banks now have a yearly cap on how many investment loans they can write each year. Only 10% of the bank’s front-book (i.e. new loans) can comprise of investment loans. So it’s much harder to obtain investment loans and they cost more. It’s annoying as a property investor, but it’s one of the ways that APRA is ensuring control of the market.
- Lenders can’t write sub-prime mortgages in Australia. In case you’re wondering what a sub-prime mortgage is, it’s where banks lend money to people who can’t repay it. Lenders here can’t do that because of that pesky, annoying and rude r-word – ‘regulation’. What it means in a practical sense is that APRA has drilled down on the banks regarding many things. APRA has pushed the banks into a corner; down to the point of telling them how they can measure peoples’ income, expenses and which affordability rates to apply when assessing loan applications. Effectively, this means that it’s harder for banks to approve any loans, and there are even stricter measures in place to prevent sub-prime mortgages from being sold (not that this was happening in the same way in Australia like it was in America’s long-time heavily deregulated market).
- Our population is actually growing, so we do actually need more housing. It’s not exactly a ‘bubble’ if the housing is actually in demand, as it is demand that drives rent prices up. In fact, we should have more investment houses on the market if we want to drive the rent prices down. Australia’s population hit 24 million last year. We are growing and our housing situation is far closer to that in London, rather that of the USA. Many people tend to be concerned about the areas with the most capital growth, and areas such as Sydney which aren’t as affordable as they used to be. Of course places like mining towns are considered to be a terrible investment, because the cash flow typically dries up as soon as the mines do. However, places like Sydney just keep growing and growing due to the sheer perception of opportunity associated with large capital cities.
These are just three of the basic factors which explain why we are different to the USA, but even they are enough to simply explain why we’re not in the same boat. Thank goodness that we’re in Australia; where our banks might be a little evil, but at least there’s APRA’s dominating choke-hold on them.