‘This is a real risk’: Morrison on mortgages

Treasurer Scott Morrison has acknowledged Australia's debt risks but believes that lending curbs are working. The RBA, however, isn't so sure that they are.

Mr Morrison is confident that Australia’s debt burden is not as bad as it appears.

Addressing Citigroup in New York last Thursday (12 October), Mr Morrison acknowledged that around 8 per cent of Australia's $2.1 trillion household debt is tied up in mortgages.

“This is a real risk, if not properly managed, and we get it,” the Treasurer said.

“Australian households are now the fourth most indebted in the OECD as a share of disposable income — behind Denmark, the Netherlands and Norway.

“At 122 per cent of GDP, our household debt is roughly two-thirds higher than the average ratio in advanced economies.

“But these figures must be understood in the context of the factors that mitigate these risks.”

The treasurer explained that, on average, Australian households have five times assets coverage over the value of their debts.

Mr Morrison said: “Total household wealth last quarter reached a record $9.8 trillion, or almost $400,000 per person, with the value of their assets being predominantly in housing.

“While Australia's housing markets, especially in our largest cities, have experienced strong growth over the past decade, this, of itself, is not evidence of an underlying weakness in housing asset values nor that a hard landing for our housing markets is ahead.

“Australian housing values, while high, are still real. Safe as houses still broadly means something in Australia.”

Mr Morrison told New Yorkers that the rise in housing values in Australia has been driven principally by genuine economic forces of supply and demand, where mortgages are subject to “full recourse finance, supported by a strong, stable and resilient banking system and world's best-practice credit standards.”

He added that low-doc “no doc” loans that crippled US housing markets are a rarity in Australia.

The treasurer was quick to praise the benefits of macro-prudential tools, explaining that since setting a cap on interest-only loans, the growth of investor lending has continued to moderate, growing at 0.4 per cent in August, the equal slowest result in the past 17 months.

However, this growth is in contrast to the latest ABS figures, which show that the value of investor loans increased by 4.3 per cent in August.

RBA questions effectiveness of lending curbs

In its latest Financial Stability Review, the central bank examined the risks in international housing markets such as Canada, New Zealand and Norway.

“Authorities in the affected countries have expressed concern that high, and rising, household debt relative to income, together with riskier lending, has likely made households less resilient to negative shocks,” the RBA said.

“At the same time, there is concern that the rapid increase in housing prices has increased the risk of a subsequent sharp price fall, particularly if it has been partly driven by speculation.

“Taken together, these developments have increased the risk of financial and macroeconomic instability.”

The RBA warned that households with interest-only loans are also more vulnerable to “payment shock” due to the increase in repayments following the end of the interest-only period of the loan.

Australia’s high proportion of interest-only mortgages has become a focal point of recent regulatory measures. Earlier this month, Westpac CEO Brian Hartzer told a parliamentary committee that 50 per cent of the bank’s home loan portfolio, or 800,000 customers, were on interest-only mortgages.

APRA’s most recent measures have targeted interest-only loans, requiring banks to ensure that no more than 30 per cent of new lending was interest-only.

Australia is not the only country using macro-prudential responses to manage housing market risks. Canada and New Zealand have implemented LVR caps; serviceability requirements have been tightened; and some international regulators, such as those in Sweden, have increased countercyclical capital buffers.

“Overall, available evidence suggests that a range of policies (including both macro-prudential and other tools) have led to some improvement in household and banking sector resilience in several markets,” the RBA said.

“However, household debt levels and housing prices remain high and continue to grow rapidly in many regions, so risks persist. Macro-prudential policies can at best moderate the growth of credit and prices for a while, but they cannot address the high levels of debt and prices.

“Further, there continues to be much uncertainty around the calibration and effectiveness of these tools. Ongoing analysis and experience will be important for understanding the impact that such policies can have on housing market risks.”

The latest housing finance figures from the Australian Bureau of Statistic show that property investors continue to drive new lending, despite APRA’s efforts to cap investor loan growth by the banks at 10 per cent.

[Related: RBA to begin 'top-down' stress testing]

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