Australian bank hearing reveals growing danger of interest-only housing loans
17 October 2017
Disturbing evidence of the vulnerability of the Australian housing market and its major banks to a sudden shift in financial conditions and any rise in interest rates emerged in the hearings before a parliamentary committee last week.
Testimony given by Westpac chief executive Brian Hartzer revealed that half the bank’s $400 billion of outstanding home loans consists of interest-only mortgages. The figure for other three of the “big four” of Australian banks—ANZ, NAB and CBA—is 40 percent interest-only.
In an article for The Conversation, reposted by the Australian ABC, University of New South Wales economics professor Richard Holden wrote that while he was not normally a fan of parliament hauling in private sector executives and asking them questions, last Wednesday’s proceedings were “both useful and instructive.”
“And, to be perfectly frank, terrifying,” he added. Commenting on what he called the “startling level” of interest-only loans—that is, loans in which the borrower does not pay back any principal for a period up to five years—Holden noted what he called the “banal response” of the Westpac chief.
Questioned on the figure, Hartzer had told the House of Representatives standing committee on economics: “We don’t lend money to people who can’t pay it back. It doesn’t make sense for us to do so.”
But as Holden remarked: “Did it make sense for all those American mortgage lenders to lend to people on adjustable rates, low-doc loans, no-doc loans etc. before the global financial crisis?”
Holden also made a scathing comment on the testimony of the ANZ CEO, Shayne Elliott, who took the same line as his Westpac counterpart,…