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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 25 March 2015

"Low levels of financial stress...more than 2 years of mortgage buffers"

FSR tackles housing

The Reserve Bank had a good look at the housing market today in its latest Financial Stability Review.

Evidently the housing market is multi-speed with some relatively weak housing markets (including Canberra, Adelaide, Perth, Hobart and Darwin) and some stronger ones (mainly Sydney, and to some extent also Melbourne).

There is plenty of competition around from mortgage lenders at the present time with some lenders offering discounts of up to 100bps from their advertised rates.

Unsurprisingly, when combined with rising prices in some markets and expectations of future price gains, this has led to an increase in aggregate mortgage demand, particularly from investors, although also from owner-occupiers in Sydney.

Financial stress declines

The good news is that according to the Reserve Bank low interest rates have seen the levels of household financial stress declining considerably.

Non-performing household loans are extremely low in the current low interest rate environment, at just 0.6 percent as at Q4 2014 down from 0.9 percent in 2011.

Low interest rates have clearly made the servicing of household debt much easier.

Applications for possessions of housing stock have continued to decline in the four largest states, and have even stopped rising in Tasmania.

Great to see.

Moreover, thanks to a unique mechanism to Australian mortgages whereby repayments may continue to be scheduled at the same level even if interest rates are cut, Australians have built an enormous aggregate mortgage buffer.

The latest figures show an extraordinary aggregate buffer (as measured by balances in offsets and mortgage redraw facilities) of some 16 percent of outstanding loan balances, which is the equivalent of more than 2 years worth of scheduled repayments at the current level of interest rates.

And the buffers are evidently continuing to grow, at least in aggregate.

The Reserve Bank also noted that households are generally saving considerably more than was the case before the financial crisis, while debt-to-income levels "have remained relatively stable for the past decade or so".

Interest payments to income ratios have also declined by nearly 50 percent since their pre-financial crisis peak, largely thanks to repeated interest rate cuts.

Risk markets

The Reserve Bank noted that - quite rightly - stricter mortgage criteria have been applied to some mining town markets and inner city unit markets.

The inner city unit market in Melbourne deemed to be a particular risk (as I detailed here previously).

The Review noted that mortgage arrears in mining towns have picked up over the last 6 months, which makes the decline in overall non-performance rates all the more remarkable.

APRA will also be keeping a close eye on the level of interest only loans.

However, the RBA concludes that generally "indicators of overall financial stress remain low".