David Fawcett (Wakefield, Liberal Party) Share this | Link to this | Hansard source

My question is addressed to the Treasurer. Would the Treasurer inform the House of the state of the US subprime housing market? How does this compare with the situation in Australia?

Peter Costello (Higgins, Liberal Party, Treasurer) Share this | Link to this | Hansard source

I thank the honourable member for Wakefield for his question and for his interest in these matters. The Reserve Bank did note in its statement today that it had given careful consideration to recent developments in the global economy and that credit markets, particularly in the US, were experiencing turbulence and that these may provide downside risks to the US economy. That is a reference to what is called the US subprime market. Subprime loans are typically loans that are made to borrowers with impaired credit histories—that is, they may have had a previous payment default, a foreclosure or a bankruptcy. Because they have an impaired credit history, the rate at which the loan is made is generally higher. Subprime mortgages make up about 15 per cent of the US mortgage market. In relation to that 15 per cent, the delinquency rate—that is, those who are in arrears in 90 days—is about 10 per cent. In Australia, the closest thing we have is what we call a non-conforming loan. Far from that making up 15 per cent of the Australian market, in Australia it is about one per cent of the market. The delinquency rate of those borrowers is about 6½ per cent. So the US has a far larger exposure to subprime lending.

In relation to all mortgages, in the United States the percentage of all mortgages that are 90 days in arrears is about 2½ per cent. In Australia the percentage of all mortgages that are 90 days in arrears is 0.4 per cent. That rate of arrears is about one-sixth of what you see in the United States. There are some Australian financial institutions that do have an exposure to the US subprime market. These are generally in funds to which mortgages have been on-sold as investments. Some of those financial institutions have been affected by developments in the United States. But I can assure you, Mr Speaker, and the House through you, that the Australian financial institutions are in a very strong position, very well capitalised and highly profitable, and our prudential regulator does not see any of the problems developing in relation to them that have arisen in the US subprime market.