“…the Aussie real estate market has lost its fracking mind”

Here’s proof positive that the Aussie housing market has COMPLETELY LOST ITS FRACKING MIND: ING’s Aussie subsidiary has just announced an interest-only mortgage with “no fixed repayment term”.

The article reads like something from 2006-era California or Florida or Nevada:

HOMEBUYERS are to be offered never-ending mortgages in a bid to overcome Australia’s affordability crisis. ING Direct, Australia’s fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.

Repayments would be kept to a minimum, allowing borrowers to benefit from capital growth in their property.

Because everybody knows house prices never go down. Right?

(On a markets-nerdy note – the prepayment risk on these is mind-boggling. With every single mortgage they write, ING would be selling an infinite-expiry American option on mortgage rates; how are they planning to hedge the world’s longest-dated short vega position?)

The last time anyone proposed infinite-term home loans (give or take) may ring a bell. It was Japan. And, intriguingly, the first reference I can find to Japan’s famous hundred-year mortgages is an ABC News piece from March 1990 – six months after the peak of the bubble.

Fortune picked up on the trend two months later:

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

(Side note: Nippon Mortgage went bankrupt in 1994.)

Sixteen years later and five thousand miles away, ultra-long mortgages reappeared… in California, in 2006:

The Methuselah of mortgages has arrived: the 50-year home loan.

Think of it as a mortgage that has been supersized. Like that other supersizer, McDonald’s, the massive mortgage was born in Southern California’s San Bernardino County. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. […]

Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage, he says.

And everyone knows how that ended.

But even those mortgages in California and Japan were standard amortising mortgages – the lender expected some principal back at a specified time. And they had fixed tenors – but ING seems to think that having no fixed tenor, and no principal repayment date, is a perfectly valid business plan.

Meanwhile in 2010, the Aussie article continues and history repeats:

“People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach” ING Direct CEO Don Koch said. “There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.”

ING says [banks’] preoccupation with paying off the loan is unnecessary. “There is no economic reason for banks to insist on regular capital repayment,” Mr Koch said.

“There is no economic reason for banks to insist on regular capital repayment”.

Famous last words.

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