Housing Debt

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GUEST OBSERVER
What if you had the lowest interest rates in a generation but no one wanted to borrow.
While Aussie consumers continue to take out loans to buy homes, they continue to slash other debt.
In fact personal credit is falling at the fastest rate for over seven years. Businesses are also not keen to borrow – credit growth is the slowest in three years. Banks and other lenders certainly have the funds – in fact annual growth of bank deposits exceeds that of loans by the biggest margin in four years.
In these more conservative and less volatile times, borrowers are also less keen to embrace margin lending. The number of client accounts stands at 13-year lows while the average number of daily margin calls is at record lows (almost 17 years of records).
The Chinese economy continues to turn over nicely despite constant worries from doomsayers to the contrary. The economy is transitioning from manufacturing to services. And the good news is that the services sector is expanding just below the fastest pace in three years. The 54.5 result for the services gauge in May was just below the recent high of 55.1 in March. The results of the purchasing manager surveys are good news for Australian exporters and importers.
<a href="https://www.propertyobserver.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.12.26%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.12.26%20AM.png" alt="">
What do the figures show?
Private sector credit
Private sector credit (lending) rose by 0.4 percent in April after a 0.4 percent gain in March. Annual credit growth eased from 5.0 percent to a near 3-year low of 4.9 percent.
Housing credit grew by 0.5 percent in April to be up 6.5 percent on a year ago – annual growth is lifting from the lowest levels in 30 months.
Owner occupier housing credit rose by 0.5 percent in April to stand 6.1 per cent higher than a year ago – the slowest growth in 19 months. Investor housing finance lifted 0.6 percent in April to stand 7.3 percent higher over the year – the fastest growth in 15 months.
Personal credit fell by 0.1 percent in April to be down 1.5 percent over the year – equalling the biggest annual decline in 71⁄2 years.
Business credit rose by 0.4 percent in April after a 0.1 percent rise in March and 0.1 percent fall in February. Business credit is 3.1 percent higher than a year ago – the slowest growth in almost 3 years (35 months). 
Loans and advances by banks rose by 6.3 percent in the year to April – the slowest pace in 31⁄2 years. Bank deposits (term, current, other and certificates of deposit) rose by 7.8 percent in the year to April – the fastest pace in 21⁄2 years.
<a href="https://www.propertyobserver.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.15.50%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.15.50%20AM.png" alt="">
What is the importance of the economic data?
 Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
The National Bureau of Statistics in China releases purchasing manager survey results for manufacturing and services sectors around the end of the month/first day in the month. The data is useful in tracking the health of the Chinese economy – Australia’s major trading partner. The data is valuable for Australian exporters and importers. 
<a href="https://www.propertyobserver.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.17.00%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/31/Screen%20Shot%202017-06-01%20at%208.17.00%20AM.png" alt="">
What are the implications for interest rates and investors?
The Chinese economic data remains encouraging, showing that the transition from the industrial sector to household sector remains on track. The manufacturing sector is expanding, while the services sector is clearly the driver taking up any slack.
The Reserve Bank may fret that housing debt is exceeding that of wages, but that is only part of the story. Consumers are trimming other debt including personal loans and credit card debt. Margin loans are out of favour despite low interest rates, low sharemarket volatility and healthy returns on investments. The issue for banks is that inflows of cash are growing at a faster rate than outflows, putting pressure on margins, profitability and potentially dividends.
Interest rates will remain on hold over the rest of 2017. There is no pressing need for a change in rates in any direction. 
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<div class="column"> Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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Slowest pace of borrowing in three years: Craig James

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The federal budget has taken positive steps toward infrastructure commitment by the government, but it still is a missed opportunity to capitalise on low bond rates and a triple-A credit rating, according to a senior industry executive.
Megan Motto, chief executive of built-environment body Consult Australia, welcomed the direction of the 2017/2018 Federal Budget but declared it a missed opportunity to capitalise on historic low borrowing rates.
Consult Australia represents 49,000 consulting firms in the built environment.
The government plans to spend $75 billion on development and upgrade of infrastructure, which includes a potential buy-out of the Snowy Hydro scheme from the states. Also included is a $20 billion rail line upgrade.
Major projects like Snowy Hydro, Inland Rail, a National Rail Program, and Western Sydney Airport, all point to a government that understands the long-term nature of infrastructure projects. But real spend on infrastructure delivery would fall as share of GDP from 25.5% to 25.2% in 2020-21, Motto said. 
Yet, “historically low bond rates and a triple-A credit rating means it has never been a better time to borrow, to take on more good debt,” Motto said.
 “This is an Infrastructure Budget 1.0 that begs for an Infrastructure Budget 2.0 to better connect the strong sense of direction to implementation and the opportunity for Australia to maintain future economic growth,” said Motto.
“This was a budget big on planning for longer-term infrastructure dividends.” 
“It recognised infrastructure as a tool to increase productivity, the importance of business case development to get the right projects off the ground, and the role of government in being able to drive economic growth.
“Over $14 billion of direct government equity in major infrastructure delivery and financing agencies,” she said.
But Motto added that “in the short term there is a sense of missed opportunity”.
Motto also lamented the foreign worker levy for businesses that will make it harder for them to bring in skills needed to deliver Australia’s infrastructure agenda.
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Budget fails to capitalise on historic low borrowing rates

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GUEST OBSERVER
Given the Reserve Bank’s intense concentration on stability issues, including the introduction of new guidelines from APRA, the April Stability Review is of particular interest.
Our interest is twofold. Firstly to gauge the degree of concern with which the Bank views the current risks and secondly whether it has released any new research which sheds more light on the issues.
Evidence on the first issue confirms the Bank’s concerns. “Risks to household balance sheets and housing markets have increased.” Compare that assessment with the previous Review in October last year, “Risks to financial stability from lending to households have lessened a little over the past 6 months.”
The risk that was emphasised back in October – “risks around the projected large increases in supply in some inner city apartment markets are coming to the fore, especially in Brisbane and Melbourne” - is still seen to be a major consideration - “concerns about an oversupply of apartments in pockets of Melbourne and in parts of Brisbane.”
Current risks around household balance sheets are seen to be macroeconomic in nature rather than direct risks to the stability of financial institutions. The key dynamic is seen to be “a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply”.
Of most interest is the investor. While the Bank recognises that arrears data shows that investors have historically performed better than owner occupiers, this observation has not been tested “in a severe downturn.”
The recent guideline from APRA to limit the interest only component of new lending to 30 percent appears to be aimed at investors. Only around 23 percent of owner occupier loans are interest only whereas 64% of investor loans are interest only. IO loans have a higher average indebtedness over the loan than principal and interest; while after the IO period expires (typically 5-10 years) repayments are considerably higher.
Since the October Review, household indebtedness has increased further primarily due to rising levels of housing debt and weak income growth.
The Bank has emphasised in the past that offset accounts and redraw facilities have increased considerably (at around 17 percent of outstanding balances or around 2.5 years of scheduled repayments at current interest rates).
But around one third of borrowers have either no accrued buffer or a buffer of less than one month’s repayments. For the vulnerable “highly indebted households”, which represent the top 10 percent on the household debt to disposable income ratio measure, only 40 percent hold any kind of buffer.
Presumably as new lending lifts this ratio will continue to rise since minimal buffers are dominated by newer mortgages or lower income or lower wealth households. This ratio strongly debunks the assertion that the “buffer” is an important source of stability.
However, in previous Reviews a much more relaxed Bank has emphasised the point that those borrowers with the high leverage tend to be the high income earners who can best manage debt. The Review takes a revised look at “Highly Indebted Households”.
The aggregate household debt to income ratio has increased further in recent years up to 160 percent, but 30 percent of households have no debt.
In assessing the characteristics of highly indebted households the Bank uses information on the distribution of debt, income, and wealth which is available in the Household, Income, and Labour Dynamics Survey (HILDA). Unfortunately this data is only available to 2014. In fact it is only collected every 4 years with the next survey due for 2018 – an interminable wait for an update to the critical issue of whether debt is accumulating with those borrowers who are the most vulnerable.
The Household Debt to Disposable Income ratio has risen from around 150 percent to over 160 percent (latest available). The Bank defines a “highly indebted” household as one with debt to income ratio in the top 10 percent. Over the 10 years to 2014, households in that group had a debt to income ratio above 550 percent and represented 35-40 percent of total household debt. Around 30 percent of the “highly indebted” households’ debts were investor loans.
Of some concern is that around 25 percent of the highly indebted households are in the bottom two quintiles for income and wealth, although this group only owes 12 percent of the debt owed by the highly indebted households.
These “ratios” confirm the Bank’s previous position that much of the debt held by highly indebted households is owed by households with high income and wealth. However, the lift in household indebtedness since 2014, coupled with the lack on any significant “buffer” for the highly indebted borrower, must be presenting reasons for the Bank and APRA to raise concerns.
The other issue is around the risks of relying on “averages” . Even though the 2014 data indicated that only 12 percent of the debt of highly indebted borrowers is held in the two bottom income quintiles, that still represents nearly 5 percent of total household debt .
The policy challenge for the Bank is clear. It’s most comforting “defence” of the risks associated with Australia’s high household debt is that high debt levels are associated with those in the best position to deal with them – high income / high wealth. But this data is already three years out of date and an update will not be available for another year at least. Household debt to disposable income ratios have lifted from 150 percent to above 160 percent over that time period and appear to be rising further.
Vulnerable borrowers with limited buffers appear to be growing. The higher risk aspects of interest only loans may be exacerbating that issue.
All the Bank can really do is focus on slowing the rise in household debt without really having much comfort about the risks they face.
For our part we remain reasonably relaxed about these risks, not because of the distribution of the debt, but because we see that Australia has sufficient flexibility around policy; its exchange rate and strong banking system to ameliorate the impact of shocks.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/">Westpac</a>. 
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Rising household debt risks but no timely measure of the effective threat: Westpac's Bill Evans

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NAB-owned digital bank UBank has launched an ad campaign featuring terminally ill Australians who talk about rethinking priorities on assets and not take on too much debt.
The ad says it is a ‘unique perspective on the Australian dream’.
UBank chief executive Lee Hatton says the advertisement, produced with support from Palliative Care Australia by the ad agency, The Monkeys has been designed to encourage viewers to question their choices when it comes to taking on too much debt, according to an article in The Australian Financial Review.
"We think it's important that Australians start thinking about borrowing less and living more. It's not morbid, there's actually a really positive message in there," Hatton said.
The ad begins with a dark line by Julie, one of the terminally ill group. “When you are given a death sentence, you really evaluate what it's all about,” she says. 
Five more terminally ill Australians speak about the pitfalls of taking on too much debt and working away all your life to repay that. 
‘It’s not about bricks and mortar, it’s about what you put into those bricks and mortar,’ says one of them in the ad, which closes with the punchline ‘Borrow less, live more.”
In the film the group speak of coming to terms with their illnesses and then reflecting on how their priorities had changed, with a focus on big ticket items such as cars and houses.
UBank will be pushing the campaign through traditional channels and social media. The video can be found at ubank.com.au/home-truths.
Mike Hill, the film’s director, has worked on a number of projects that focused on people nearing the end of their lives. 
"It's an exploration of the Australian dream and it's really refreshing to hear people calling that out and saying 'Hey maybe that really big mortgage, that big house with all the bells and whistles isn't that important to your quality of life'," Hill said.
UBank previously ran a campaign that tried to reframe the concept of home ownership to include apartments after conducting research that showed large numbers of young people had given up on "the great Australian dream".
The digital-only bank does not lend on loan-to-valuation ratios of more than 80 percent.
It has 350,000 customers.
To view the campaign, <a href="https://www.youtube.com/channel/UCmRY0GyFo0t8xBgd8-v7J6Q" target="_blank">click here</a>.
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Terminally ill feature in UBank ad to spread message on borrowing less

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It would however more than likely add further momentum to the property market and expansion of household leverage, according to Merrill Lynch economist Alex Joiner. 
"It is our view that future risks outweigh any benefit especially when we consider any future tightening cycle," he said.
"Future risks will define any tightening cycle.
"Indeed, we already think that the level of dwelling prices and household debt pose significant future risks to the economy without the RBA exacerbating them with even lower interest rate settings.
"And because of this, we think the balance of downside risks in the economy will increasingly transition from the business sector to the household sector. This is especially true when the RBA eventually does raise rates from what are record ‘emergency’ lows.
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It would however more than likely add further momentum to the property market and expansion of household leverage.
"It is our view that future risks outweigh any benefit especially when we consider any future tightening cycle.
"Future risks will define any tightening cycle.
"Indeed, we already think that the level of dwelling prices and household debt pose significant future risks to the economy without the RBA exacerbating them with even lower interest rate settings.
"And because of this, we think the balance of downside risks in the economy will increasingly transition from the business sector to the household sector. This is especially true when the RBA eventually does raise rates from what are record ‘emergency’ lows.
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Joiner reckons the RBA decision making or lack thereof has arguably encouraged asset price inflation, household debt accumulation and almost inevitably speculative activity in the property market.
"In our view, the RBA and prudential regulators have been too cautious in its treatment of the property market in this easing cycle.
"It seems clear to us that stronger macroprudential measures should have been put in place significantly earlier than the ‘soft’ measures that are currently in place.
"And now, we think it may be a case of too little too late.
"In hindsight, it may have been worth it for the RBA to sacrifice some of the positive dwelling price impact on consumer spending and residential construction in order to reduce future risks (and potentially elongate cycles).
"Our analysis suggests that dwelling prices growth will decelerate markedly by the end of 2016 to be at or around the pace of income growth.
"Yet once the rate tightening cycle has begun, we would expect house prices to be 5-6% lower by the end of 2017.
"China is not the only hard landing risk in town.
"The scenario that is our base case, outlined above, looks for a modest but not detrimental decline in dwelling prices that will weigh on growth.
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"We are not forecasting collapse or the bursting of any perceived bubble.
"That said, it is not difficult to envisage a more ‘hard landing’ scenario in the property market. 
This would clearly have a greater negative macro-economic impact channelled through households and the residential construction cycle.
"A recent investor trip highlighted such an event as a key concern for clients across all asset classes along with a hard landing in the Chinese economy.
"We highlighted recently that the latter is a low probability, high impact, event that would be difficult for policymakers to manage. 
"A disorderly decline in dwelling prices is a greater risk in our view and would be equally high impact and difficult to manage.
"It could come from a number of sources: households; investors; inadvertently from the RBA itself; or a combination of all three.
"Clearly the RBA will be closely watching dwelling prices as it eventually tightens policy.
"At best, we will escape with some cyclicality in dwelling prices that has little material impact on the broader economy.
"At worst, a hard landing that could represent a marked setback for the economy in coming years," Joiner advised.
 
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