Well, remember the adage, money makes the world go around? That pretty much sums up why we are no longer immune from what happens across the globe.
Put simply, lenders and banks in Australia, lend money to homebuyers here using money they have borrowed from America. Now that supply of US cash has stopped.
Commonwealth Bank chief executive Ralph Norris sums up the American housing crisis.
"Basically (in the US) you've got a lot of people who didn't really qualify to undertake the loans that they were given," he said.
A classic depiction of what is now known as the US sub-prime mortgage crisis is Mrs Busby’s story.
"SO, my home loan repayments could rise because families 16,000km away in America have reneged on their mortgage payments? How does that work?"
Well, remember the adage, money makes the world go around? That pretty much sums up why we are no longer immune from what happens across the globe.
Put simply, lenders and banks in Australia, lend money to homebuyers here using money they have borrowed from America. Now that supply of US cash has stopped.
Commonwealth Bank chief executive Ralph Norris sums up the American housing crisis.
"Basically (in the US) you've got a lot of people who didn't really qualify to undertake the loans that they were given," he said.
A classic depiction of what is now known as the US sub-prime mortgage crisis is Mrs Busby’s story.
In 2005 she remortgaged her family home of 11 years. She borrowed $US170,000 ($203,000 Au), the value of her house at the time, to help pay off student debts, a car loan and other personal borrowings. She knew the 7.6 per cent interest rate she had been offered was scheduled to jump sharply after two years.
But she had assumed she would be able to find a new deal, with a new lender, when the time came around. What she hadn't banked on was the value of her home slumping to $US125,000, leaving her with no prospect of refinancing a new loan an agreeable terms.
Also, after the 2 year fixed term her monthly mortgage payments jumped from a little over $US1000 a month to more than $US1500. With a monthly salary of $US4000, this was too much to take. Mrs Busby joined the long list of American home owners to go into arrears and experience the process of repossession – a process which more than 2 million American home owners are expected to face within the next 18 months or so.
While some point to rising default rates in the US subprime mortgage market, which caters to borrowers with poor credit histories, as the root cause of the problems plaguing the housing market, Moody's Economy.com said an unwieldy supply of unsold homes is the prime factor.
The U.S. Census Bureau said that, as of the third quarter of 2007, there were close to 2.1 million vacant unsold homes for sale, equal to 2.6 percent of the stock of owner-occupied homes.
A well-functioning housing market has a substantial amount of inventory, but in the quarter century between the early 1980s and mid-2000s, the vacancy rate stayed near 1.7 percent.
The difference of excess inventory in the market, which currently totals nearly 750,000 homes and is by far the highest level of excess inventory in the post-World War II period, Moody's Economy.com said.
The problem that started in the US quickly spread globally as fund managers around the world bought these US sub-prime mortgages and bundled them up (known as securitised investments) and sold them to institutional investors.
The securities held by the funds were supposed to be ultra-safe, and had AA or AAA credit ratings. But when mortgage defaults began to rise, it became apparent that some of these ratings were a little optimistic. By the middle of June 2007, banks were trying to get their money out of the crumbling funds.
Dozens of mortgage lenders across the US had been forced into bankruptcy by the subprime fallout, pushing the global fear up a notch. Share prices of exposed companies began to tumble as sub-prime lenders around the world started going into administration.
Banks were beginning to hoard cash, thanks to warnings from the US Federal Reserve that there were still some $US100 billion of losses from sub-prime mortgages somewhere in the system.
Banks were becoming increasingly unwilling to lend to one another. The interest rates that banks charge one another to borrow money overnight were soaring.
"There's been a ripple effect right around the world, like a tsunami," said Finance Expert Peter Switzer.
One way to think about how a little credit problem becomes a big one if transparency is lacking is this: in front of you are 10 bottles of water, one of which is poisoned. You are offered a bottle. The chances are it is perfectly safe. But would you drink it?
The US Federal Reserve is now on the job, having already cut the Federal funds rate (the equivalent of our cash rate) from 5.25% to 2.25%. This will ease the pressure.
Australia’s increases in interest rates have occurred for two reasons; the Reserve Bank lifting rates to ease inflation and also local lenders lifting their rates to off-set the increase in the costs of funds from overseas.
At present there are over 650,000 Australian households in mortgage stress with the last four interest rate rises alone adding a further $200 per month to the average mortgage repayments.
With recent domestic growth figures slowing there may be some interest rate relieve soon.
