I think you are missing the whole point of the Fed report. They are discussing the situation *before* record unemployment i.e. the period when US employment was even better than Australian employment today and house prices started falling and defaults rising.
At the time the Dallas Fed wrote that article (Nov 2007), unemployment in the US was only 4.7%. Which was a lot better than the current unemployment rate in Australia. In fact during the turning point period when house prices started stagnating and defaults started rising, unemployment actually *fell* in America from 5.0% in 2005 to a low of 4.4% in mid-2007.
In fact belief in the fallacy that high unemployment is needed to cause a housing downturn rather than the other way around was one of the reasons for the problems in the US. As the Dallas Fed paper points out, the banks built in to their risk models the assumption that as long as unemployment remained low defaults would as well. Their risk models collapsed when defaults rose with rising interest rates and falling house prices (which prevented people from getting out at least even) even with low unemployment.
Also in terms of low interest rates, what the Fed was referring to was the period after 2001 recession to about 2004. Then in the US interest rates started rising and helped drive along the defaults. Hence the comparable period is actually 2008-2009 here when interest rates were all time lows.
FHB are not strictly subprime, but they are amongst the most vulnerable to default. They are usually on lower salaries, the least equity in their property, the least buffer, the first to get fired. Also, I think historically speaking, defaults peak 2-3 years after the loans are made, anyway, which would be right about now. Also remember being young - FHB usually don't have many assets anyway and so despite the loans being full recourse - well so what? If you have nothing, the banks can't take it. And remember they have low equity in their houses. Which tallies well with the American experience where subprime borrowers in full-recourse states were just as happy to throw the keys back to the bank. They also the most time to rebuild their finances after a default.
And I have strong suspicions about the quality of the loans. Being in the FHB age group myself I have lots of stories from friends who bought during that time about how easy it was to get loans, using the Boosted Grant as a deposit. And this included friends loaded down with other debt such as credit cards. Being from an immigrant background, I also know plenty of recent immigrants, working in fairly menial jobs (they don't speak English), who very easily got home loans in that period too.
The important thing is to look past the label "subprime" and think - did lots of people get loans in the post-GFC era who would have been highly unlikely to get loans using normal credit standards? Also how many buyers did the boost drive to buying before they were ready?
As for over-building - see Melbourne, the Dublin/California of Australia.
Some interesting thoughts - but your comparisons are right off.
Subprime was lending to borrowers who had no visible means to repay - erog the term NINJAS loans (no income, no job/assets/savings). FHB-ers might be mortgaged to the hilt, but they still had to jump to hoops to show that they could (at the time of application) they could pay the loan back. They also make up a small percentage of home owners, although a larger percentage of mortgage holders.
Interest rates are not at an all time low (ie, 0-1%). They are currently hovering a slight fraction under average. The Reserve Bank has a lot of ammo still up it's sleeve if required. As for the banks being "loaded down". Sure, banks always hold a larger proportion of new loans because the mortgagee "hasn't had a chance to pay it off". Quite simple really ... although term deposit rates are dropping as the banks also become loaded down with money.
Employment is around 5.5% - granted this is not "full employment" as many as either casual or part time and would like to be full time ... but nowhere near the real 20%+ of the USA.
There was not the massive overbuilding of entire estates that took place in the USA ... they would develop and 1,000's of houses at a time with no presales, and then try to sell them. Many of these are now being bulldozed.
Entire massive population centres are not losing their entire base of employment, ie, Detroit. Sure manufacturing is suffering badly in Australia, but that is because we need to darn well wake up to ourselves and realise we can't compete with the likes of Asia and India in cost ... we are a smart country and we need to manufacture "value added" products. This is starting to happen and our small size, and non reliance on traditional manufacturing, will make it easier to flex into these changes.
I personally am positive about Australia. I think we have the ability to, although we'll be hit, ride this negative period and come out stronger ... if only the Government would stop piddling around with sensationalism, make the decisions required and move on.
