No Taming the Debt Beast

Mortgage lending is slowing.

According to Corelogic, housing finance commitments in January 2018 were $33.1 billion. That was a 0.7% increase from the previous month, but 2.2% lower from last year.

Out of that amount, $21.2 billion were owner occupier mortgages, while the remaining $11.9 were investor mortgages. While owner occupier mortgages are up 4.4% from this time last year, investor mortgages are down 12.1% for the same period.

Corelogic housing finance commitments 22-03-2018

Source: Corelogic
[Click to enlarge]

With the mortgage market slowing, banks are getting into a bit of a price war to get bigger market share.

This month, the big four slashed fixed rates on mortgages. A move also targeted to attract investors.

The rate cuts started coming a day after an announcement from the Australian Prudential Regulation Authority (APRA) chairman, Wayne Byres. He said that the 10% cap on investor credit growth is ‘probably reaching the end of its useful life.

Which could mean that APRA may be ready to lift some restrictions.

Loosening credit restrictions now, as the market is slowing could boost demand again.

But as Byres noted, the 30% cap on interest only mortgages is staying.

Interest only mortgages have dropped in recent months. Their share currently makes up 15.2% of all new mortgages. This is well under the 30% cap, and way lower than the peak at 45.6%.

Interest only mortgages have dropped in recent months 22-03-2018

Source: Corelogic
[Click to enlarge]

Many of the smaller lenders have also followed the big four in decreasing mortgage rates.

Which shows that the banks are betting on the Reserve Bank of Australia (RBA) not raising rates any time soon.

In fact, the RBA’s governor Phillip Lowe recently confirmed this himself. As reported by ABC:

Dr Lowe told a room of leading business figures that although “it is likely that the next move in interest rates in Australia will be up, not down”, the RBA “does not see a strong case for a near-term adjustment in monetary policy”.

Low interest rates could keep on fuelling the housing market

Even with all the recent restrictions, house prices are still growing…albeit slower.

According to a recent release by the Australian Bureau of Statistics (ABS), residential housing prices rose by 5% in 2017. Much of the growth was on the June (10.2%) and September (8.3%) quarters, with December quarter growth only at 1%.

In December 2017, Australia’s housing market was valued at $6.9 trillion. That is a $92.9 billion rise from just three months before, and around $1.8 trillion increase since 2014. That is, in the last four years Australia’s dwelling values have increased by over 36%!

They are now at the highest level on record.

Meanwhile, Australian salaries have gone nowhere. Australian wages are not growing anywhere near as fast as housing.

While employment has kept increasing, wage growth has remained subdued.

High household debt still extremely concerning

Wages not growing and property prices at record highs mean that household debt is reaching record highs. And household debt is already becoming a burden that could restrict growth.

Australian household debt is at one of the highest in the world, at almost 200% debt to income ratio.

Household debt affecting consumption is a big worry for the RBA. As they noted in their last meeting:

The housing markets in Sydney and Melbourne had slowed in preceding months and conditions in housing markets elsewhere had been relatively stable. Tighter credit standards had been helpful in containing the build-up of risk on household balance sheets. Housing credit growth had eased, particularly for investors. However, household debt levels remained high, which contributed to the uncertainty surrounding the outlook for consumption growth. Members agreed that household balance sheets still warranted careful monitoring.

The main argument for high housing demand which in turn has pushed values higher is that Australia has had high population growth.

Yet, while Australia has had high immigration in recent years, I am not sure I buy this theory. Numbers from the Australian Bureau of Statistics show that 11.2% of Australian properties are empty.

That’s a lot of empty houses.

While Australia has had high population growth, in my opinion, low interest rates have aided and abetted the massive increase in property prices.

The RBA kept their rates unchanged at 1.50% once again this month. Rates will likely remain on hold until wages start picking up.

Meanwhile, the US Federal Reserve has been raising rates. US rates are now above the Australian rates for the first time in 18 years.

As more banks around the world follow suit, at some point the RBA will have to raise rates to keep the Australian dollar competitive.

At some point, they will have to tackle and tame the debt beast.

Kind regards,

Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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