Is household debt the real reason people are concerned about a crash in the Property Market?
Unless you’ve been living under a rock over the last few years, you’re probably aware that real estate in Melbourne and Sydney has been experiencing a surge in growth. There are many who believe that keeping up with this surge in prices is a catalyst for a housing crash in Australia because of high household debt levels, and perceived poor lending practices.
Much of the recent gains in house prices in these areas have been attributed to the RBA’s use of the cash rate setting after the mining boom in 2011 and an increase in demand due to rising populations.
While the average household debt levels in Australia are high, further investigation into the nature and distribution of this debt indicate that the issue isn’t as bad as it seems.
The chart below indicates that most of the household debt is held by higher income families.
Is our household debt level affordable?
Paul Bloxham, chief economist at HSBC recently stated that “For tax reasons there is a focus on reducing debt on owner occupied mortgages on real estate in Australia. As a result, the average mortgage in Australia is over 2.5 years pre-paid, which offers a significant buffer in the face of a negative income shock”.
In terms of affordability, ABS Census data has indicated that the median mortgage payment in 2011 was $1800 per month, but in 2016 it was down to $1755.
During the same period median household income increased from $5330 to $6205 per month. Of course, the increase in affordability was helped by a drop in the cash rate (and there is the risk of interest rates rising in the future), however the point here is that affordability for real estate has improved since 2011.
So, what about all this dodgy lending (especially interest only) we keep hearing about? Perhaps that could cause a property crash in Australia? In fact, mortgages for individuals in Australia are full recourse loans and generally we don’t have sub-prime or low doc loans any more. Then there’s the intervention on banks from the Australian Prudential Regulatory Authority (APRA)…
In August this year the Reserve Bank governor Phillip Lowe told a parliamentary hearing that “he was happy with the way the recent lending curbs have played out in the market” after APRA’s limits on investor and interest only lending. In fact, the June quarter aggregate value of interest only loans fell for the first time since 2009.
Mr Lowe said that, based on RBA figures, he is confident that Australian banks are within APRA’s 10 per cent cap on investor lending and 30 per cent limit of new interest-only mortgages as a proportion of total lending.
Mortgage Choice chief executive John Flavell recently went a step further and stated that “Tightening of credit policies is coming to an end. Changes announced so far should allow banks to comply with the 30% cap and start easing the tighter conditions in the interest-only market”. This is encouraging news for investors.