Record debt threatens economy
The Australian 12:00am January 8, 2018
David Uren
LOCs, Top-Ups, Buffer loans, PLs and Cr Cds pile on extra DEBT. The 1% arrears rate is nonsense!!! The payments are being paid on time every month from the bank aadding to the pile of debt on a monthly basis! Its all paper entries. But loans are often in default for four years!!
Debts across the country have hit a record high of double household incomes and are still climbing, making it difficult for the Reserve Bank to raise rates and increasing the risk to the economy from any downturn in housing prices.
Reserve Bank analysis of the latest national accounts shows debt is 99.7 per cent higher than the total earnings of all households, having risen from 67 per cent greater three years ago. Households are still adding to their debts as new home buyers enter the market for the first time, established homeowners upgrade their houses and investors add to their property portfolios. Housing debts rose $110 billion, or 6.9 per cent, in the year to November
Although the Sydney market has cooled and rates have risen for investors, owner-occupiers are still being offered record low rates, with Westpac last week advertising special discount rates as low as 3.6 per cent. The Reserve Bank’s analysis shows that despite record debts, spending on mortgages still accounts for only an average of 7.2 per cent of all household incomes across the population, which is the same as in 2004 when mortgage rates were above 7 per cent.
The Reserve Bank has been concerned by the relentless rise of household debt that is among the highest in the advanced world. Governor Philip Lowe warned late last year that high levels of debt threatened the stability of the economy.
Wage income growth is rising at only 2 per cent or less than a third the pace at which households are taking on new mortgages, so debts will continue to rise compared with incomes.
CoreLogic research director Cameron Kusher says that until now, the rise in debts has been matched by the rise in the value of housing assets. Over the past three years, Reserve Bank analysis shows housing assets have risen from a multiple of 4.1 times average income to a current level of 5.2 times income.
However, with the housing market turning, particularly in Sydney, households will see the value of their assets drop while their debts remain the same. “If housing is falling, it has the potential to have an impact in other areas like retail,” he said.
CoreLogic anticipates further falls in Sydney prices this year, while the pace of price growth will slow in Melbourne with the possibility of falls by the end of the year. Mr Kusher says a rise in interstate migration may support the Brisbane market.
“Our view is that housing market conditions will be softer than in 2017 and, come the end of the year could see national values driven a little lower,” he said.
Mr Kusher said it would be hard for the Reserve Bank to lift interest rates, given the elevated level of household debt that has made people more sensitive to interest rate changes. “If they start lifting interest rates for owner-occupiers, it can syphon a lot of demand out of the market very quickly,” he said.
JPMorgan economist Tom Kennedy said it would take many years to work off the accumulated debt levels and this would constrain the RBA.
He noted that a lot of debt had gone to people on lower and middle incomes who previously had low levels of borrowing. “If the Reserve Bank did raise rates, a lot of households would not have the buffer to absorb those increases,’’ Mr Kennedy said.
He said the Reserve Bank would be more likely to try to limit further growth in borrowing by working with banking regulator the Australian Prudential Regulation Authority to impose further curbs on higher risk lending. APRA has limited interest-only lending and has curbed the growth in banks’ investor loan portfolios.
Commonwealth Bank senior economist Michael Workman said the steps by the Reserve Bank and APRA over the past two years had already improved the quality of mortgage lending. “The tests for people taking on more debt are a lot stricter than they were four or five years ago,’’ he said. “People have to be able to service the mortgage at 200 basis points over the current rate.”
He said the effectiveness of the regulatory action was shown by the very low level of non-performing housing loans.
“All the major lenders have arrears rates of 90-plus days overdue of less than 1 per cent of their mortgage book,’’ Mr Workman said.