Is Australia’s household debt putting the economy at risk?
It certainly came as no surprise that the official cash rate was kept on hold by the Reserve Bank Board at its April 2017 meeting. But there were a few raised eyebrows, in light of new data showing that Australia’s dwelling values have been increasing at their fastest pace in seven years.
Some have said the RBA is “between a rock and a hard place”, effectively trapped by the need to avoid adding more fuel to the property market by cutting the cash rate, and being unable to lift the rate because the unemployment rate has worsened, retail spending has fallen and inflation remains weak.
A major concern for RBA governor Phillip Lowe is that soaring house prices are pushing up Australians’ household debt to income ratio, which Dr Lowe said was already at a record high earlier this year.
Dr Lowe told the RBA Board Dinner that the bank has been concerned about rising household debt for some time, and the country’s leading financial regulators have been discussing it at length.
“The level of household debt in Australia is high and it is rising,” Dr Lowe said. “Over the past year the value of housing-related debt outstanding increased by 6 ½ per cent. This compares with growth of around 3 per cent in aggregate household income. The result has been a further rise in the ratio of household debt to income, from an already high level.”
While Dr Lowe said that while households are coping reasonably well with the higher debt levels, with mortgage arrears rates remaining low and many households having built up sizeable buffers in mortgage accounts, the slow growth in wages is making it harder for some to pay down their debt. “For many people, the high debt levels and low wage growth are a sobering combination,” he said. “Stretched balance sheets make for more volatility when things turn down.
“Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.”
Different cities, different markets
The situation is made more complex by the fact that Australia’s housing market conditions are not a “one size fits all.”
While Sydney and Melbourne markets are still very strong with prices continuing to increase, conditions in other cities are not faring as well. Perth and Darwin, for example, have experienced declines.
According to research group Corelogic, residential property prices have increased 12.9 per cent in the past 12 months, with prices in Sydney increasing 18.9 per cent – the fastest rate of growth in almost 15 years.
“Four of Australia’s eight capital cities [Sydney, Melbourne, Hobart and Canberra] are now showing an annual growth rate in dwelling values higher than 10 per cent,” said Tim Lawless, head of research at Corelogic.
RBA head Dr Lowe blamed the rapid house price inflation in Sydney and Melbourne on “unexpectedly” high population growth, a lack of supply of new homes and under-investment in transport infrastructure, compounded by profit-hungry speculators.
“Not surprisingly, the rising prices have encouraged people to buy residential property as an investment in the hope of ongoing capital gains,” he said.
“With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices.”
- Sydney (18.9 per cent)
- Melbourne (15.9 per cent)
- Brisbane (3.7 per cent)
- Adelaide (3.4 per cent)
- Perth (-4.7 per cent)
- Hobart (10.2 per cent)
- Darwin (-4.4 per cent)
- Canberra (12.8 per cent)
Applying the brakes
Around the world, surging house prices are a concern for global regulators as they seek to prevent the asset price bubbles in the post GFC era of record low cash rates. Australia’s regulators, in addition to those in Ireland, New Zealand and a host of other countries, have introduced macroprudential rules in a bid to curb house price growth.
In 2014, the Australian Prudential Regulation Authority (APRA) placed a 10 per cent limit on growth in new lending to investors, while in recent times APRA issued new rules to limit the flow of interest-only mortgage lending by banks to 30 per cent of new loans issued.
“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience,” Dr Lowe told the RBA Board Dinner. “With interest rates so low, now is a good time for us to move in this direction.”
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