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Sydney’s Mortgage Loan Exit Strategies: Cashing In On Profits – Getting a job, maintaining a decent credit history, saving for a deposit and applying for a home loan has been the simplest way to own property in Australia. But was it always this systematic?
Below is a quick overview of the Australian home loan timeline. It puts into context the events that define Australian mortgages today, right from the beginning.
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The timeline of Australian mortgages began with the passage of the Real Estate Act 1862, first by Victoria and then other states.
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However, the Australia-wide property rights we know today were only introduced later in 1886 in South Australia.
The Lands Act 1886 aimed to identify and record ownership details of land or property to reduce the incidence of fraud that occurred at the time.
Australian banks operated in a free banking system even after the establishment of the Federal Bank of Australia earlier in 1881.
It was around this time that there was a lot of speculative demand in the real estate market. And the establishment of a number of building societies and land banks began.
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The supply far exceeded the demand for properties. A direct result was the collapse of the Premier Permanent Building Association in December 1889, one of Melbourne’s largest building societies.
Finally, the failure of the Federal Bank in January 1893 made the banking crisis evident. In May of the same year, eleven major commercial banks across the country had suspended business.
The failure of the Central Bank made clear the need for a separate central bank to restore public confidence in the banking system. Thus the Commonwealth Bank of Australia (CBA), a commercial bank established on 22 December 1911, was given central bank powers in 1920.
It was the first bank to receive a federal guarantee. The guarantee included that the state undertook to guarantee all deposits in the bank.
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As Reserve Bank, he took over responsibility for issuing Australian notes from the Treasury.
In the 1990s, public sector revenues dropped significantly as most industries did not perform well. As a result, there was a decline in borrowing as well as government spending.
The recession got worse when most other nations went into recession and foreign investment stopped flowing. Demand for Australian exports also fell.
After the recession, as a way to avoid another recession, the Australian government put in place the following regulations:
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The Commonwealth Bank (CBA) began to face criticism for acting as a central bank and a trading company at the same time.
So, in 1960, the Australian government established the Reserve Bank of Australia (RBA), which took over as the central bank.
Its policies covered losses that lenders incur if a borrower defaults on their mortgage.
The insurance encouraged banks to be less strict with their lending criteria because even if the borrower defaulted, they got a backup.
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Banks were doing the bare minimum to provide better loan-to-value ratios (LVRs) and competitive interest rates to borrowers.
Non-bank lenders began to rise in the market to provide borrowers with better deals and packages. Banks lost their mortgage market share from 90% in the 1950s to 70% in the 1970s.
The formation of the Mortgage Finance Association of Australia (MFAA) provided representation and accreditation to all operators in the mortgage industry.
The Australian government allowed foreign banks to enter the market. There was increased competition in the mortgage industry.
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By abolishing the separate classification of savings banks and commercial banks, there was an opportunity to expand the loan types for apartments from residential to commercial.
Its main role is to oversee and report on the actions of financial institutions, including banks and the mortgage industry as a whole.
Its role was also to establish and enforce prudential standards and practices to ensure a competitive financial system.
Various lenders offered a new range of products to meet the needs of those who could not meet standard lending criteria.
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Lenders also introduced new mortgage features such as redraws, offsets and lines of credit so borrowers could better manage their mortgages.
Also in 2001, the government established the Australian Securities and Investments Commission (ASIC). It regulates Australia’s corporate markets and financial services sectors.
As a result of the US housing bubble that peaked in 2004 and rising mortgage defaults, the GFC hit Australia in mid-2007.
Wholesale lenders were most affected by the GFC because they would bring capital into the international market to provide cheap interest rates.
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They did not offer competitive interest rates due to the global financial crisis meant that borrowers saw no reason to choose them over banks.
As a result, wholesale lenders’ market share fell from 13% in mid-2007 to around 2% in early 2009.
Big banks also bought some wholesale lenders. And thus the market share of banks increased from 60% to 80% in these two years.
Banks regaining market share and wholesalers losing theirs led to a sharp decline in subprime and bad loans in 2011.
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The Australian government began offering various grants and programs to entice first home buyers to buy a new property.
It then required each lender to lend investors a maximum of 10% per year of its total loan book.
The government started to crack down on foreign investors by increasing the penalties for those who broke the rules on foreign investment.
After closely monitoring mortgage lending trends for more than three years, APRA concluded in 2017 that risky mortgage lending activity existed.
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It mandated all Australian Depository Institutions (ADIs) to set their interest-bearing loans at 30% of their book value.
It also introduced stricter internal limits for interest-only loans for a loan-to-value ratio (LVR) above 80%.
The big four banks were under scrutiny for alleged misconduct such as benchmark interest rate manipulation and mortgage fraud.
Thus, on December 14, 2017, the Royal Commission on Banking was established. Its main role was to check any kind of fraud in the banking, pension and financial services sector.
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After the Royal Commission on Banking, restrictions on interest rates and lenders moving away from risky loans, it became more difficult to get a mortgage.
In 2018, lenders were setting lending standards more stringently to restore their reputations than in years.
Housing loan growth was clearly on the decline with 5.87% of new loans in 2018 compared to 6.6% the previous year.
A significant strengthening of Australia’s mortgage lending standards led APRA to raise the interest rate benchmark on 1 January 2019.
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The Australian Deposit Institutions (ADIs) had to provide substantial assurances of improved lending standards to lift the benchmark.
The economic crisis caused by the Covid-19 pandemic began to show its effects on the Australian housing market only late.
Real estate prices usually need to be affected by economic fluctuations, the reason being that houses are more difficult to buy and sell than stocks and bonds.
Nevertheless, the economic crisis hit the mortgage market in the first quarter of 2020. In the beginning, there were defaults on mortgages, payments on maturity, reductions in mortgages and real estate prices. All this, primarily because unemployment has skyrocketed.
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However, the Australian government and the mortgage industry were quick to predict such changes and were therefore able to implement defensive measures quickly enough.
From the perspective of lenders, for those who are unable to repay due to the pandemic, mortgage moratoriums were put in place.
It showed a total of $51 billion worth of loans due to temporary deferment of repayment, which was about 1.9 percent of total lending.
In November 2020, the RBA cut the official cash rate to a record low of 0.1%. Prior to this, the lowest the RBA had ever taken its cash rate was 1.5% in 2020.
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The direct effect on borrowers due to low cash interest rates was that banks were now able to provide home loans at the lowest possible interest rates.
With the telecommuting experience and the lack of space, the demand for spacious accommodation created an imbalance between demand and supply.
Since they intend to set higher interest rates in the coming months, they also started to slow down their lending completely.
With many changes underway, it would be interesting to witness how the Australian home loan timeline plays out over the next few days.
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