Australians are a cautious bunch. And that, according to the latest Lombard Street Research (LSR) Daily Note, means that recent “Big short-type concerns seem overblown”.
LSR says that this is the case even though “spurred by easy monetary policy and a buoyant property market, the leverage of households – predominantly mortgages – has risen to a record 1.8 times income”.
That, along with the falling savings rate which fell to a fresh post-GFC low of 7.6% in the December 2015 quarter, is naturally “raising questions about the robustness of household balance sheets given frothy housing market conditions”, LSR said.
But using a “simple model based on net worth and terms of trade to predict a historically ‘appropriate’ savings rate”, LSR says it finds Australian households have been “relatively conservative, putting aside considerably more than would be justified by the surge in housing assets (which comprise the lion’s share of their net wealth)”.
This phenomenon strikes us as primarily precautionary in nature. Consumers seem to have acted on the (very sensible) assumption that the exuberance which accompanied the mining boom was not permanent, and were then quick to adapt to the collapse in terms of trade – and the resultant deceleration in wages – over 2012 . In other words, as the ‘supercycle baton’ was passed from iron ore to the housing market, households remained prudent despite a surge in their net worth.
This caution LSR talks about echoes comments made by Luci Ellis, head of the RBA’s financial stability department, last week in her speech Booms, Busts, Cycles and Risk Appetite.
Ellis said, “Anecdotally at least, across a wide range of domains, it seems that Australia, as a society, chooses more safety than the average industrialised country does.”
Like Ellis, LSR points out that because of low interest rates, Australian households have been getting ahead on their mortgages which have,”been growing by some 30% a year – far outpacing mortgage credit – to exceed 6% of housing loans outstanding,” LSR said.
That means the net increase in leverage is slower and lower than the headline suggests.
As a result, LSR says that this is not a rerun of the early 2000s housing spike because the savings, and offset, behaviour of households, “reduces the likelihood of a severe house price correction.”
Which means that (our emphasis):
‘Big short’-type concerns seem overblown. House prices are showing healthy signs of cooling, confirmed by data on dwelling approvals and auction clearance rates, while tighter regulation has slowed the growth in investor (buy-to-let) mortgages. Foreign flows into Australian property might also moderate: not only could Beijing tighten controls on capital outflows, but real estate prices are now much less attractive following a strong four-year rally and recent strength in the A$.
Of course the test will really come next time interest rates, or unemployment rises. But neither of these are on the forecast horizon.
So in the end, LSR says Australians are providing their own buffer.
“By keeping savings high it is Australian households themselves that are enabling relatively smooth navigation of the commodity supercycle – this time they have made their own luck,” they said.