Lenders berate Howard's plan to split home loans
By Tom Allard
October 2 2002
http://www.smh.com.au/articles/2002/10/01/1033283491325.html
A Liberal Party proposal to boost home ownership by encouraging financial institutions to become silent partners in properties has been dismissed by lenders as impractical, with the potential to further inflate the property price bubble.
Some economists also criticised the idea of split equity loans, saying they would fuel inflation and disadvantage the people they were designed to help - those unable to enter the market in expensive cities such as Sydney and Melbourne.
Analysts say the Prime Minister, John Howard, is acutely sensitive about the possibility of a property downturn after a surge of home buyers were encouraged to enter the property market with first home owners grants of up to $14,000.
The split equity plan proposed by Mr Howard last month would see banks, mortgage managers or investment companies taking about a half share in a home and lending the rest to the occupier.
The financial institution would make a profit on any capital gain when the property was sold, while also participating in a new market for real estate securities, in which the equity in homes could be freely bought and sold.
The supposed advantage for borrowers is that they can buy a house - albeit a share of it - by taking out a far smaller loan, an attractive option in cities where house prices are high.
Officially, the banks and the Australian Bankers' Association are still considering the proposal. Privately, however, they are sceptical whether it can be implemented.
One senior banker said banks would get a smaller return and would require the borrower to pay them "rent" on the portion of the home owned by the bank.
"How that would work I don't know," the banker said.
"Otherwise, we're just slashing our returns or fundamentally changing our business."
Mortgage insurers said they were unlikely to be able to underwrite these loans, which, they said, would be more risky for financial institutions - and thus likely to attract a higher interest rate than standard loans.
That risk would be exacerbated if property prices fell.
The managing director of Aussie Home Loans, John Symond, said he was happy to examine the proposal but said "there needs to be a lot more research on this one".
"If the incumbent [the owner-occupier] wants to sell or renovate, what is the investor going to do?" he said.
"The timing isn't right to roll this one out."
The principal economist at the National Institute for Economic and Industry Research, Craig Shepherd, said the proposal would push up house prices, benefiting existing owners but potentially pushing prices further out of reach for those wanting to enter the market.
"It's inflationary, and I'm not sure how it furthers in any way the concepts of home ownership," Mr Shepherd said.
One prominent economist, who asked not to be named, said: "This is the whackiest policy this Government has come up with. It's crazy stuff .
"The Government has been pushing the property market around ever since GST, helping inflate prices and creating a bubble," the economist said. "This policy will most likely just make it worse."