Tag Archives: mortgage

Australian households ‘world-beating borrowers’

When Atlassian co-founder Mike Cannon-Brookes reportedly paid close to $100 million for the Fairfax family home in Point Piper this past week, it helped confirm that housing in Sydney and Melbourne has become seriously expensive.

The world’s longest property upswing (55 years and counting according to the Bank for International Settlements[1]) and a surge of more than 60 per cent in the past five years (notwithstanding a modest downturn in the last 12 months) will do that.

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But just how expensive has Australian property become?

One way to look at it is how much buyers have to borrow to be able to afford a home in Australia, and on this front recently-released figures compiled by the International Monetary Fund[2] provide an intriguing insight.

They show that, when it comes to going all-in to buy a house, no-one comes close to Australian borrowers.

In the three months to June, almost two-thirds of all loans (by value) in Australia were mortgages, which is far higher than any other nation for which the IMF has published figures.

Of the 79 other countries, including 23 advanced economies, that provided financial data to the IMF for the June quarter, none had a home-to-total-loan ratio above 46.3 per cent – a figured dwarfed by Australia’s 63.7 per cent.

The huge share of loans that are for mortgages isn’t being driven by more people borrowing. In fact, the number of owner occupiers taking out loans has been remarkably stable over time. In July 2005, there were 55,123 such borrowers. Twelve years later, in July 2017, there were 54,881.

But over that same period, the proportion (by value) of all loans that were for housing jumped from 56.3 to 63.75 per cent. Some of this growth was surely down to more investors getting into the property market. But the biggest driver was likely to be the surge in house prices over that time.

The preparedness of homebuyers to borrow so heavily to buy housing indicates a number of things:

  • a belief that a mismatch between supply in demand in key city markets will persist;
  • that this mismatch will drive house values up in the longer term;
  • that a mixture of fear and greed is at play – fear of being permanently priced out of the property market, and strong desire to grab a share of housing capital growth; and
  • that residential property will deliver better returns than other asset classes (noting that many are exposed to the sharemarket through their superannuation accounts).

The heavy borrowing required to compete in the recent property market has, of course, made households heavily indebted.

Household debt as a proportion of gross domestic product was at 104.9 per cent in the middle of the year, according to the IMF (Trading Economics/Bank for International Settlements reported it was 122.2 per cent)

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Current low interest rates have until now helped households carry this burden without too much distress, and less than 1 per cent of loans are ‘non-performing’. This is a world away from the situation in European countries hit hardest by the GFC, who are still climbing out from under their debt mountains. In Italy, for instance, more than 14 per cent of loans are still considered non-performing, and in Greece the ratio is a disastrous 45.6 per cent.

But the Reserve Bank of Australia, for one, sees, the level of household debt as a risk for the economy.

As a proportion of disposable income, the central bank warns it is high. The slowdown in wealth accumulation from the cooling property market, along with stagnant wages, has the RBA concerned that household consumption – a key driver of economic growth – could be weaker than it expects.

Moreover, others warn that a significant proportion of borrowers will struggle financially as interest only-loans transition into standard principle-and-interest mortgages in the coming year or so.

Against this, the jobs market is tightening, and there are nascent signs that wages are finally picking up.

The RBA’s core scenario is for above-trend growth driven by solid business investment and a gradual improvement in household consumption, which is underpinned by bigger pay packets, more jobs and low interest rates.

But the not-insignificant risks to this outlook posed by high household debt mean the current period of monetary policy stability – the RBA’s cash rate of 1.5 per cent hasn’t changed in more than two years – is set top continue for a while yet.

 

 

[1] https://www.smh.com.au/business/banking-and-finance/bis-says-australias-55year-house-price-upswing-the-longest-in-the-world-20171016-gz1kdc.html

[2] http://data.imf.org/regular.aspx?key=61404589

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For interest rates, the only way is down

People might complain about mixed messages coming from the US Federal Reserve, but the same cannot be said about the Australia’s Reserve Bank at the moment.

The message from RBA Governor Glenn Stevens was about as unambiguous as a central banker can get: if there is to be a change in official interest rates in the next little while, the only direction will be down.

Mr Stevens highlighted the dovish sentiment currently prevailing at the central bank at the moment to the 2015 Economic and Social Outlook Conference in Melbourne today.

“Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening,” he said, adding that “an accommodative [monetary policy] stance will be appropriate for some time yet”.

But those hoping the RBA might be inclined to offset recent mortgage rate hikes by the big banks with a rate cut of its own are set to be disappointed.

Mr Stevens said that the recent increases had only partially reversed the decline in mortgage rates enjoyed by owner-occupiers this year, and those most affected were investors – a segment of the market policy makers will be happy to see cooled off a little.

Overall, the increases have been equivalent to half a 0.25 percentage point increase in the official cash, and have taken back just a quarter of the interest easing that has occurred since the start of the year, Mr Stevens said.

The RBA does not seem fussed by such a marginal tightening. The governor pointed out that “this increase is from the lowest rates that any current borrower will have ever seen”.

Change is happening

The central bank has also sought to bring some perspective to discussion about the country’s economic prospects, particularly the short-term growth path.

Mr Stevens said that the country had navigated the after-effects of the biggest terms of trade boom in 150 years reasonably well, managing to continue to grow despite the big plunge in mining-related investment.

Promisingly, he thought the country was about halfway through the decline, and the “headwinds” it was causing were currently about as intense as they were going to get.

The rebalancing of the economy away from resources-led growth toward other drivers of expansion, particularly burgeoning services activity, is, Mr Stevens said, well underway.

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When the bank calls, bells start ringing

If, like me, in the last couple of days you’ve had a call from your bank eager to talk about how to they could save you money on your mortgage, you’ve probably twigged that something is up.

Usually they call to flog insurance policies I don’t want, or offer a lift in my credit card limit that I can’t afford.

So to hear them actually prepared to come to the table to strike a cheaper deal on what is one of their core products is an interesting development.

It tells me that their own economists have told them the prospects of an official interest rate rise sometime this year are looking pretty slim.

This is no news to the market, which sees no chance of a rate hike before March next year, and instead is pricing in the possibility of a rate cut.

As RBA Governor Glenn Stevens put it today when announcing the Reserve Bank Board had decided to hold the central bank’s cash rate steady for a seventh consecutive month, “on present indications, the most prudent course is likely to be a period of stability in interest rates”.

It also shows that the field of competition has well and truly shifted from deposits (remember when the interest rate on 3-month deposits reached above 5 per cent? It is now down to around 3 per cent), and the scramble now is to sign up home buyers.

It is pretty clear that at the moment the economy is like a dog on roller skates, desperately trying to gain some traction.

Mr Stevens said that, while consumer demand was “slightly firmer”, and data foreshadowed a “solid expansion” in housing (building approvals jumped 6.8 per cent in January to be up almost 36 per cent from a year earlier), demand for labour is weak and the unemployment rate is likely to rise higher.

Its cause isn’t helped by a Federal Government that at every opportunity thunders about the dire state of the nation’s public finances and hints darkly at the need for painful spending cuts.

In central bank-speak, “public spending is scheduled to be subdued”.

It can’t be doing anything to improve the willingness of businesses to invest. Official figures confirm private capital expenditure has been sliding for the past couple of years, even as profits have grown – gross operating profits were up 107 per cent in the year to the December quarter, yet over the same period private capex fell 5.7 per cent (and spending on plant and equipment plunged more than 16 per cent).

As Mr Stevens put it, resource sector investment is set to decline significantly, while there are only “tentative” signs of improvement in investment intentions in other sectors.

The economy is partly the victim of an unfortunate clash of timing between the business and political cycles.

The incentive for the Abbott Government is to cut hard in its first Budget, giving itself room for vote-enhancing largesse closer to the next election, while the economy could do with some productivity-enhancing infrastructure investment.

Fat hope of that at the moment.

Even more people are likely to be out of work in the coming months, and being able to negotiate a cheaper mortgage is likely to be of little comfort.

 

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