Australia’s household debt levels could approach record levels towards the end of 2021, new analysis from CoreLogic suggests, putting renewed focus on the Reserve Bank of Australia’s (RBA) hands-off approach to the current cash rate and broader prudential measures.
The Delta variant of COVID-19 will temporarily take some of the wind out of the economy’s battered sails, the RBA said Tuesday, meaning any economic bounce-back will be “slower” than the resurgence seen last year.
As a result, the RBA again signaled it will hold the cash rate at 0.10% until its wage growth and inflation targets are met — or 2024, by the central bank’s own estimates.
In a Thursday breakdown of the current lending environment, CoreLogic Asia-Pacific research director Tim Lawless said current credit standards are currently “prudent”.
However, the two-fold issues of household debt and debt-to-income ratios could come to influence decision making on lending conditions in the future, Lawless said.
March 2021 figures provided by the RBA show household debt-to-disposable income ratios hit 180.9%, tapering off from the highs of 188.5% seen in June 2020.
Yet the ratio “has likely risen further” since March this year, he said.
“Considering the pace of growth in housing credit against a backdrop of soft income growth, in all likelihood, household debt, (of which housing debt is the primary component) will be at or close to record highs by the end of 2021,” he said.
The latest debt-to-income figures will be released later this month.
Hyperactive property price growth through much of 2021, paired with nearly non-existent wage growth, has also influenced the shape of current lending.
The Australian Prudential Regulation Authority (APRA) states that of all new residential mortgages funded through the June 2021 quarter, 21.9% had a debt-to-income ratio equal or greater than 6x.
That figure was 16% in the June 2020 quarter, and as low as 14.6% in the June 2019 quarter.
The growth in this kind of loan is “another warning sign”, Lawless said.
“A sustained period where household debt grows at a faster rate than incomes implies a build-up of medium-term risks that could trigger a tightening of credit policy.”
Potential interventions could come in the form of tighter assessments of a borrower’s ability to service a loan, or limits on how many highly-ratioed loans a lender could provide across its portfolio, he said.
But Lawless conceded some recent findings were “less cautionary”.
APRA states the percentage of lending with a loan-to-value ratio of greater than 90% fell to 4.6% in June 2020, down -0.2 points from a year prior.
This in itself may be a function of unfathomable housing prices through first half of the year, with even the most optimistic owner-occupiers potentially less likely to stretch their future finances quite so thin.
Further ‘good’ news for buyers can be found in the fact that house prices, while rising, are no longer accelerating at the absurd rate seen through the early months of the year.
Yet the underlying conditions which have encouraged so many Australians to dive into a hyped-up housing market will likely linger,” Lawless said.
“Of course, the tailwind of persistently low mortgage rates and improving economic conditions once lockdowns are eased or lifted will help to keep a floor under housing demand,” he concluded.