Household sector downsides to serve as ‘handbrake’ on price growth

Speaking at S&P Global Ratings’ Australian Property Seminar 2019, Erin Kitson, S&P’s director of structured finance ratings, noted that recent political and economic developments – which include certainty over property taxation, the Reserve Bank  of Australia’s recent cuts to the cash rate, and changes to mortgage serviceability guidance – would help improve demand for housing credit and could in turn place upward pressure on residential property prices.

However, Ms Kitson added that weakness in some economic indicators would offset the stimulus, making particular reference to subdued wage growth and household indebtedness.

“I think the extent to which [stimulus helps] mount a recovery will be restrained in some respects by a more cautious household sector,” she said.

“We still have weak wage growth and a high level of household indebtedness, so I think that will act as a slight handbrake on property prices taking off again any time soon.”

The latest Household Income and Wealth data from the Australian Bureau of Statistics (ABS) revealed that 28.4 per cent of Australian households were burdened with debt proportionate to at least three times their income, up from 27.2 per cent in the previous recorded period and up from 23.8 per cent a decade prior.

According to the ABS data, income growth also slowed relative to previous periods, with average weekly household incomes increasing by $44 to $1,062 in 2017-18, compared to an increase of $220 to $1,018 in the four years up to 2007-08.

Subdued wage growth partly contributed to the Reserve Bank’s decision to lower the cash rate in both June and July by a cumulative 50 basis points.

Arrears ‘deteriorating’ but ‘stable’

Reflecting on credit quality trends, Ms Kitson said that despite the recent rise in over 30-day arrears across Australia’s mortgage portfolio, S&P’s outlook remains stable in light of positive labour market conditions.

“On that front, our loan performance outlook is still stable, and that is underpinned by a relatively low unemployment rate and continued jobs growth, which potentially may slow, but in the main, we think that supports our safe stable outlook for loan performance over the next 12 months,” she said.

Ms Kitson noted that the recent rise in delinquencies has been mainly concentrated in the resource states of Western Australia and Queensland, where sharp falls in dwelling values at the conclusion of the mining boom inhibited borrowers that had fallen into negative equity from refinancing.

Further, Ms Kitson does not expect the arrears rate to spike in Sydney and Melbourne, where property prices have been pronounced over the past few years.

“Despite the fact that some of the larger property price declines have been in inner Sydney and inner Melbourne areas, our arrears statistics shows that those areas where you have bigger job markets and lower unemployment rates are still where area performance tends to be stronger,” she concluded.

[Related: Warning issued over housing market ‘bull trap’]