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Ellis Says Australia to Avoid U.S.-Style Housing Slump

The U.S. needs to make its mortgage market more attractive for banks and provide additional adjustable rates for homeowners to improve the health of the housing industry, a Reserve Bank of Australia official said.

“The United States has chosen a host of institutional arrangements outside the housing-finance system that result in U.S. households facing more idiosyncratic and collective risk than their counterparts in many other developed countries,” Luci Ellis, head of financial stability at the RBA, said in the text of remarks to a panel session at the Federal Reserve Bank of Atlanta 2012 Financial Markets Conference.

She advocated a popular mortgage in Australia that allows borrowers to make prepayments that can be redrawn later. “Think of this as like a home-equity loan where the maximum balance declines over time,” she said, adding they have been an effective vehicle in Australia for “precautionary savings.”

While Australia avoided a property bust during the 2008-09 financial crisis, house prices dropped by the most on record in 2011 as global economic uncertainty and concerns about its impact at home kept a lid on demand.

A private survey today showed Australian consumer confidence fell to an eight-month low as concern mounted among mortgage holders paying the highest borrowing costs across major developed nations.

Americans “are not more prone to whipping themselves into a speculative frenzy” than people in other countries, Ellis said.

She said a healthy mortgage market is only feasible when sound mortgage lending is an attractive business for prudentially regulated firms.

“During the boom, on-balance sheet mortgage lending was not seen as being profitable or attractive business for U.S. banking institutions,” Ellis said. “That is extraordinary to foreign eyes.”

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