Ask any doomsayer what’s up with the Australian economy and after a few short words about the end of the mining boom they’ll get to housing. It’s too expensive they say, it’s a bubble, there’s too much debt, prices are unsustainable, it all has to end, the sky will fall, we’ll all be rooned.
Of course any casual observance of house prices over the last 15-20 years, certainly in Sydney, and to a lesser extent Melbourne, is troubling. But, if there is one narrative in the doomsayer thesis that is consistently wrong it’s that a bursting housing bubble will bring the economy crashing down, lead to a flight of capital, and cause problems for the banking system.
Yes, parts of the housing market are overcooked, but markets don’t have to crash to correct. As we saw in the aftermath of the Sydney bubble in the early part of this century the correction can be prices going sideways for a while.
No doubt that’s whyRBA Governor Glenn Stevens pointed out today that when it comes to the hot spots of Sydney and Melbourne “data on prices suggests that things have slowed down in both those cities.”
Likewise, Perth is working through the mining boom excess. But the rest of the major capitals have been fairly quiet recently, with more reasonable growth rates.
While the focus is often on booming prices and investor lending as the cause of a looming catastrophe, there are signs that the Australian housing market is more resilient than a simple consideration of prices suggests.
How do we know this? Because since July the RBA has been collecting granular-level data on around 2 million housing loans representing around 25-30% of Australian housing debt.
RBA assistant governor Guy Debelle told an audience yesterday that data includes:
62 loan fields such as loan balances, interest rates, arrears measures; 18 borrower fields such as borrower income, employment type, whether they are an investor or owner-occupier, whether they are a first home-buyer; and 13 collateral fields (that is, detail on the collateral underpinning the mortgage) including postcode and property valuation.
So even though the data comes from residential mortgage-backed securities (RMBS), the sample size is big and diverse enough to make representative estimates of the Australian housing market as a whole.
Debelle highlighted two things which suggest housing, or at least borrowers, are in good shape.
First is that most loans at origination are in the 70-80% LVR range and for the subset of loans included in the RBA’s data “there are almost no loans with an LVR greater than 90%, even though around nearly 10% had an LVR greater than 90 at origination.”
He notes that loans in the RBA’s RMBS pool might be a little older than the entire bank portfolios, which might affect those metrics, but the drift from high to low LVRs is clear.
What’s also clear, and perhaps the more telling statistic underpinning the health of Australian borrowers, is the repayment buffer between what they should have paid off a mortgage and what they have actually done.
two-thirds of borrowing is covered by a repayment buffer of at least one month’s worth of required mortgage payments, and for half of this, that buffer is more than one year.
So 50% of Australian home owners are more than a year ahead in paying off their loan. Little wonder ratings agency Standard and Poors reported this morning that Australian housing loan arrears fell to just 0.88% in October, the fifth consecutive monthly fall.
Why is this important for housing and the economy?
Because when you distil down all the doomsayer arguments about Australian housing, it’s hard to disagree that we could see a price correction, perhaps a big one. But because Australian housing is mostly lent under full-recourse mortgages home owners can’t just walk away and hand back the keys – lenders will chase them and borrowers must pay costs.
So the only real threat to housing and the economy is a significant downturn and the associated spike in unemployment. And the good news on that front is the RBA’s data shows that almost half of Australia could skip paying their loan for 12 months and still be ahead of the scheduled balance.
That gives those borrowers and the economy plenty of wriggle room.