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HSBC forecaster dispels mortgage debt fears

Australian borrowers have been diligently paying off their loans and are “well ahead” on their mortgages, despite growing fears over record levels of household debt, according to a leading economist.

Speaking on a panel at the Fitch Ratings 2018 Credit Insights Conference in Sydney on Wednesday, HSBC Australia chief economist Paul Bloxham contested the audience’s view that high household debt and lower consumption are the biggest threat to Australian corporates.

“To me, there isn’t as strong a connection between household debt and consumption as a lot of the other analysts are pointing out,” Mr Bloxham said. “I say that with a caveat — if there was a global downturn, or one of those big global risks played out, we are going to be more vulnerable because we have higher household debt levels.

“But in the case where we just keep growing and the economy keeps lifting and we see the unemployment rate gradually fall, it’s not clear to me that household debt levels have had that much of an impact on consumption in recent years.”

Contrary to popular opinion, Mr Bloxham said that Australian households have become more cautious in recent years and aren’t using their homes as cash machines.


“Post-GFC, they have been injecting equity into their dwellings, not withdrawing it — they were doing that back in the early 2000s. As interest rates have come down, households have paid down their mortgages faster than they need to, so much so that the average mortgage in Australia is 32 months prepaid.

“Why? Because when interest rates started to come down, everyone kept paying the same overall repayment, which became more principal and less interest, and are well ahead on their mortgages.

“The ‘mode’ of the story is one where people have been cautious around their spending behaviour. They have not been using their home as an ATM and spending more on consumer goods because their house price has been rising. There is almost no evidence that that has happened.”

Mr Bloxham said that Australian mortgage holders are not using the equity in their homes to purchase new cars, boats, holidays or furniture.

“That’s what we saw between 1997 and 2003, when there was significant levels of household equity withdrawal,” the chief economist said.


“In recent years, we have seen a significant injection in household equity.”

The economist’s comments come after the Reserve Bank of Australia warned that many households could be paying off their mortgage for longer than they expected as a result of continually subdued income growth.

On Tuesday, RBA deputy governor Guy Debelle noted that mortgage risks have been heightened by slow wage growth, adding that, in the past, mortgage pressures were offset by inflation.

“One reason why I think debt remains high relative to income has been because income growth has been unexpectedly low,” the deputy governor said.

“In past decades, one of the easiest ways to pay down your mortgage was through inflation. Higher inflation was accompanied by higher wages growth.

“Because the mortgage is fixed in nominal terms, the debt level declined quite rapidly relative to a household’s income when incomes were growing quickly.”

Mr Debelle claimed that borrowers could be forced to tackle larger levels of mortgage debt for a longer period of time.

“Household income growth has been subdued for a number of years, which means that a number of households may be carrying a larger mortgage for longer than they expected when they took out the loan,” Mr Debelle continued.

“While they can service the mortgage, it has consumed a larger share of their income for longer than they might have intended.”

HSBC’s Mr Bloxham said that wage growth is essential to forecasting the Reserve Bank’s next move on monetary policy.

“Wage growth is the key,” the chief economist said. “If you want to know what the RBA is going to do next, it is all about wages. When does wages growth start to pick up — that is a fundamental part of the story.”

The latest figures from the Australian Bureau of Statistics, released on Wednesday, show that wages rose by 0.5 per cent in the first quarter of 2018.

ABS chief economist Bruce Hockman said that wage growth in the March quarter 2018 continues a period of subdued first-quarter rises, primarily driven by regular increases in the education and training and health care and social assistance industries.

[Related: Economist ‘nervous’ about credit restrictions]

HSBC forecaster dispels mortgage debt fears

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