Australians added another $105.4 billion in mortgage debt in 2014. That left residential loans at an all-time high of $1.28 trillion.
That 9% growth rate on all loans is amazing in a context when consumer confidence is below average, when paying down debt has never been easier – due to low rates – and when overall domestic consumption has been weak enough to see the RBA cut rates to 2.25% with a strong chance they’ll cut again to 2%.
But 9% growth in 2014 masks statistics which suggest that while the overall average loan balance only rose by 3.4% to $241,000, there are a number of borrowers who are becoming dangerously leveraged.
While owner-occupied loans rose 7.4% to $839.8 billion, investment loans grew 12.2% to $439.804 billion. This represents 45% of all new loans during 2014. More worryingly, interest-only loans increased from $403 billion to $463.8 billion – a 15.1% growth rate over the year.
This increase in interest-only loans (where investors pay off only the interest applied to the loan to stop the debt rising, but no principle) each month represents 57.7% of the increase in mortgage debt held by households in 2014.
As Saul Eslake points out Australian household debt is well out of line with other developed markets and at a new all-time high.
Clearly at a time of peak debt, and with more and larger investment and interest-only loans being taken, there is also an increased level of speculation occurring in the Australian housing market. Investors appear to be using the tax shelter of negative gearing and betting that the price appreciation of housing will be enough to repay their debt at some point in the future.
It’s not hard to understand why APRA and the RBA are cracking down on investment lending.