John Mulcahy, chairman of Mirvac Group, claims that Australian housing is not a bubble and is unlikely to experience a crash because home owners here cannot simply hand the keys back. From The Australian:
“Our mortgage market is different to the American mortgage market, so we have never had the bubble they have”…
“People can send the keys back in the US. They can’t send the keys back here”…
“Prices are high at the moment, but do I think it will crash? I don’t have the sense that it will. Do I think that prices will continue to grow? I’m not sure.”
It is true that Australian foreclosure laws are generally more strict than the US, but the claim that borrowers in the US can simply walk away from their mortgages and the bank cannot go after their other assets is factually incorrect. The below table, which comes from a 2010 Federal Reserve Bank of Richmond Working Paper, classifies each US state into recourse (i.e. where the banks can go after a borrower’s other assets) and non-recourse (i.e. where they cannot):
As you can see, the overwhelming majority of states in the US have been classified by the Federal Reserve as recourse.
Moreover, the two states which had the highest level of mortgage delinquencies – Nevada and Florida – were in fact recourse states:
We might add some cultural differences. For instance, Americans tend to be less negative than Australians about personal bankruptcy, owing to their entrepreneurial spirit, which might make some difference.
But let’s also not forget that Ireland – one of the epicentres of the global housing bust – had some of the harshest bankruptcy laws in the world, whereby citizens can be jailed for failing to repay a loan, and it did very little to prevent a bust there.
Interestingly, the authors of the Federal Reserve Working Paper estimated that the threat of recourse reduces mortgage defaults by around 20%. This suggests that while Australia’s stricter full-recourse foreclosure rules could help to reduce the severity of any housing downturn, they are no panacea.
