Is Australia at risk of a sub-prime crisis?

Australia isn't at risk of a US style sub prime crisis, according to Anthony Richards, head of economic analysis at the RBA. This may seem obvious, with the style of loans on offer in Australia and the fact that lending standards are much more stringent than in the US. However, the concern has been raised that with first home buyers grants and record low interest rates, many non-suitable candidates for loans will be 'sucked in' and be unable to meet repayments when rates return to normal levels.

As the article mentions, first-time buyers accounted for a record 26.5 percent of dwellings that were financed in January, up from 18.1 percent a year earlier. Will this mean more defaults? Certainly. Will it mean we will have a sub-prime style crisis? No. These aren't exactly honeymoon rates, and although rates will no doubt return to higher levels, they won't skyrocket in the way sub prime structured loans did in the US. Those were basically loans designed to screw people over and take their homes. Terrible, really.

On another note, the Australian reported yesterday that more dwellings will be constructed in Adelaide next year than in Sydney. You read that right, not on a population/relative basis, but overall. 7500 dwellings are expected to be constructed in Adelaide, with 7300 in Sydney. The gloomy times for the stagnant Sydney property market look set to continue.

DS