Have you met Freddie and Fannie?
Do you think perhaps I’m using some clickbait here saying that, should these products be rolled out in Australia, that it comes at the expense of your superannuation and retirement income?
Think again.
There is more here than meets the eye. Let me explain.
Let’s take a look at what happens in America where such mortgages are a reality for most homebuyers. And for good reasons.
Over 70% of all current outstanding mortgages in the US are 30-year fixed rate mortgages. Recall that these rates don’t move higher or lower for the duration of the term. If you’ve ever wondered why land prices rebounded so heavily after the pandemic, one of the drivers was buyers locking in the attractive low rates on said mortgages after multiple US Fed rate cuts.
You think those same buyers aren’t sitting pretty now with the prevailing rates over 6%?
In an ironic twist, this dynamic also demonstrates the downside of having 30-year fixed terms. You see, those same buyers are now extremely reluctant to either refinance or sell. Simply because the cost of servicing a new mortgage would be significantly higher.
It keeps a massive number of existing homes off the market, allowing the owners to continue to capture the large land price increase since 2020, meaning any potential buyer has to offer much more in the hope of having a bid accepted.
And therefore, they are forced to borrow more. It’s not a surprise that the volume of transactions has slowed down.
The key difference between the US and Australian mortgage markets comes down to the combination of “Fannie” and “Freddie.”
In other words, Fannie Mae, and Freddie Mac. Congress chartered these two companies to support the U.S home finance system. Fannie Mae and Freddie Mac do this by purchasing mortgages from lenders, packaging them into securities, and selling the securities to investors.
Both companies exist purely to support the U.S. home mortgage system. But they don’t lend money to individuals. Instead, they buy mortgage loans from the banks and financial institutions that originate them.
This keeps money flowing back into lending institutions, so they have plenty of funding on hand to write more mortgages and help more people buy homes.
You may know these as mortgage-backed securities. This enormous liquid market means the US real estate market stands alone from the rest of the world.
And it provides a floor where you can have 30-year mortgages at fixed rates be the dominant product. History shows the average time these loans are held is almost 10 years. That is because the borrower either moves house or refinances (at a lower rate). So, the majority of these loans never reach maturity. And that’s important.
Three-decade fixed rate mortgages are available and prevalent in the US because there is a viable secondary market of investors who buy bonds created from the bundles of mortgages or mortgage-backed securities that Freddie and Fannie create.
Lenders do not need to hold a loan on their books for 30 years at a fixed rate as they can package together new loans and sell them to investors such as insurance companies, pension funds and bond mutual funds.
Which bring us back to Australia, and its superannuation system.
There’s a sting in this particular tail.
Lacking the type of liquid bond market of the US, it’s too difficult for the Australian banking system to offer 30-year fixed terms. For those unaware, the longest fixed rate terms here are 5 years in length.
But if you are BlackRock CEO Larry Fink, the solution to replicating that market is obvious.
“We believe Australia should be building a 30-year fixed-rate mortgage market. If you have a great idea, you can get capital. You can’t do that here [in Australia]. You can’t do that in Europe. You can’t do that in Japan or Korea.”
One problem in Australia, Fink argues, is that “the banking system is much larger than the capital markets.” The creation of a market to support 30-year fixed-rate mortgages, as are common in the US, would be one way to help solve this.
Enter the superannuation industry.
With over $4 trillion in assets, it is this pool of money that Fink believes has the long-term investment mindset to create this market.
“Australia has a perfect opportunity right now, with all the long-term savings in the superannuation system. What would be better than to create a 30-year mortgage market here that gives more confidence to the Australian consumer? Because when they own a home, they know for the life of that ownership that at the time they’re in that home, their payments are fixed.
There’s a lot of pressure on the supers to invest more back in Australia. What better way can they invest than by building out a mortgage market?”
Add in the dynamic that US consumers have on a per capita basis far more of their wealth invested directly into US equity markets than Australians, simply because their largest personal expense is fixed for such a long term.
It’s a win-win, no?
Got your real estate cycle lens handy
Should government sign off on this, and the super industry is amenable, then your valuable retirement funds will be used to underwrite these fixed mortgages. Such that, should you feel this product is the best possible way for you to achieve home ownership, then you must make a stark choice.
The amount needed to borrow to buy an average home is at 20-year highs. And if central bankers everywhere continue their interest rate cut bias, then eventually the monthly servicing costs of a 30-year fixed loan become extremely appealing. But the ultimate peak of the current real estate cycle is approaching.
And when that peak turns to bust everything exposed to land will undergo a violent and rapid devaluation. And that places your super, your retirement funds, directly in the face of the coming maelstrom. Even if you choose not to apply for a 30-year fixed mortgage!
Never has it been more important that you have dependable and durable advice to guide you through such a momentous decision. That’s why you would be well served to become our latest Boom Bust Bulletin (BBB) member.
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Each month this history and knowledge will be yours via monthly written editions and video postcards that will help explain the real estate cycle like never before.
As sad as it is to say, this is the colossal sting in the tail here. Simply because governments, central bankers, the banks themselves, do NOT understand the real estate cycle. If they did, they would see the danger signs here and simply never allow such systemic risk to be built up in the nation’s single most important retirement system.
As usual, they will simply be too late to recognize it.
Have you thought about the pressure of falling land values, loans that suddenly go underwater and a bunch of borrowers who now can’t afford the monthly payments will do to your retirement funds?
You can be mortgage free yourself and yet still stand to lose!
Most don’t even want to think about such a reality, but you can be prepared.
And save your financial future and possibly your retirement too.
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