In an address to the 2019 Property Leaders’ Summit in Australia, the Reserve Bank of Australia’s (RBA) head of financial stability, Jonathan Kearns, discussed the factors contributing to the continual rise in home loan arrears.
The latest data from ratings agency Standard & Poor’s reported that over 30-day delinquencies underlying Australia’s residential mortgage-backed securities (RMBS) increased to 1.53 per cent in April, up from 1.51 per cent in the previous month and from 1.36 per cent in April 2018.
Mr Kearns claimed that “cyclical upswings” in arrears are attributable to weak economic conditions, which include falling or stagnant wages, and softness in the housing market – which may inhibit some borrowers from selling their property to ease their mortgage burden.
The head of financial stability also acknowledged that tighter lending standards can conversely impact a borrower’s ability to meet their mortgage repayments, pointing to previous restrictions on interest-only lending, which prevented borrowers from rolling over the interest-only period.
Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.
However, Mr Kearns pointed to internal data collected by the Reserve Bank, which suggested that the application of tighter lending standards has been “effective” in improving credit quality.
“Using the Reserve Bank’s Securitisation Dataset, we find evidence consistent with more recent cohorts of loans having lower arrears rates than earlier cohorts,” he said.
“Specifically, those loans originated in the past few years have an arrears rate that is up to one-quarter of a percentage point lower than loans originated prior to 2014.
“The lower arrears rates for more recent loans suggest these tighter lending standards have been effective.”
However, despite noting the improvement in credit quality for less-seasoned loans, Mr Kearns said he expects the overall arrears rate to continue rising but claimed the trend would not pose a significant threat to financial stability.
“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer,” he said.
“But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”Australia’s recent housing correction has been “orderly”, rather than concerning, according to HSBC’s chief economist.
Speaking at the Governance Institute of Australia’s Governance and Risk Management Forum in Sydney on Tuesday (18 June), HSBC chief economist Paul Bloxham said that, contrary to alarmist commentary, Australia’s recent housing downturn has been “orderly”, especially given the substantial run-up in house prices from 2012 to 2017.
“National house prices rose by 50 per cent between the middle of 2012 and the middle of 201 – and they’ve now fallen by 10 per cent at a national level. If you want to take that to a city level, in Sydney, [prices] rose by 75 per cent.. and then [fell] by 15 per cent. In Melbourne, they rose by 60 per cent… and they’ve now fallen by 11 per cent,” he told attendees.
As such, Mr Bloxham said that before seeking an explanation for the recent decline in house prices in 2018 and onwards, the question that should be asked is: Why did they go up by 50 per cent?
The simplified explanation is that demand for housing was strong in 2012 and supply was scarce.
The HSBC chief economist explained that there were multiple concurrent factors that drove up demand, which include: the “accumulation of strong population growth”, foreign interest in housing, and investors looking to capitalise on the rise in house prices.
Home loan interest rates also began coming down at the time, Mr Bloxham noted.
“Why did interest rates start to come down in 2012? Well, we had [an] exceptionally large mining investment boom… and it peaked in 2012. At the time, the RBA was holding very, very high interest rates to slow down all the other sectors of the economy to make way for the mining boom,” he explained.
“Then in 2011, they started cutting their cash rate… to try and stimulate growth in all the other sectors of the economy to rebalance it from the mining sector towards the other sectors.
“One of those things that it did, of course, was drive stronger demand for housing. That was part of the intention.”
The chief economist additionally noted that there was a greater focus on building mines than houses at the time.
“So housing demand was running well ahead of housing supply,” Mr Bloxham said.
Furthermore, he said global interest rates were “phenomenally low”, which led to a strong boost in housing investment by foreign investors, particularly from China.
Why did the housing boom end?
All of these “forces” that drove up house prices in Australia also began to dissipate, according to Mr Bloxham.
“We saw a tightening of prudential settings. The authorities had gotten worried that the investor was overly involved in the housing market. So they gradually and incrementally tightened up the lending rules from late-2014 onwards,” he said.
“Then we had the banking royal commission… and that tightened up the settings.”
Foreign demand also “dried up”, the HSBC chief economist noted, due to China putting in place capital controls in late 2016.
“[There was] constrained capital coming out of China, partly because the domestic banks stopped lending to anyone who couldn’t demonstrate a domestic income,” Mr Bloxham said.
Further, housing supply has “finally caught up to demand”.
“All these various forces came into play to cool the housing market,” the chief economist said.
An ‘orderly’ cool-down
Contrary to the “hyperbolic” rhetoric around falling house prices, Mr Bloxham said the decline has been “orderly”, rather than concerning.
“If you had said to me or [other] economists and observers three years ago that ‘house prices are going to fall 10 per cent’... We would have been a lot more worried about financial stability than we’ve been. As it turns out, it’s been a very orderly correction,” he said.
He added that the cool-down is “exactly the right solution” for improving housing affordability.
“There’s only two ways to do it: house prices need to come down or income growth needs to pick up,” the chief economist said.
While the labour market has been “holding up pretty well”, there have been signs of weakness lately, which, among other concerns such as low inflation growth, prompted the RBA to
cut the official cash rate to the new record low of 1.25 per cent.
“The RBA, up until very recently, was very reluctant to cut its cash rate any further, thinking there’s not much more that can be achieved,” Mr Bloxham noted.
“We’ve had a fall in job advertisements; we’ve had a pullback in hiring intentions in business surveys, not dramatically, but certainly enough to see that the momentum in the labor market is likely to ease in the second half of this year; and the unemployment rate itself has lifted from 4.9 per cent to 5.2 per cent over the past three months.
“I think that’s the thing that’s changed the RBA’s perspective.”
Looking forward, the HSBC chief economist said the Coalition government’s proposed personal income tax cuts, which is yet to pass the Senate, will allow the RBA to “sit still in the second half of this year”.
However, as predicted by many other
economists, Mr Bloxham said there could be another cash rate cut this year.
“The thing to keep in mind is that the RBA has got capacity to cut further… they’ve got capacity to do other things as well. Other central banks around the world had to deliver unconventional things like quantitative easing,” he said.
The chief economist added that the government is “more cashed up” that it has been in a while, so if there is a serious threat to the economy, the government can intervene where necessary.
“At a fundamental level, we’ve got a budget surplus for the first time in 10 years; they are more cashed up than they’ve been for quite some time; we’ve got low levels of government debt; we have fiscal capacity; the government has the capacity to deliver more support for growth if they need to,” Mr Bloxham.
He believes Australia’s economic health depends on international movements.
“It really depends on: 1) how much the trade policy tensions continue to ratchet up; 2) what effect it has on China and on China’s trade; and 3) how much capacity the Chinese have to continue to stimulate their domestic economy. [Australia is] fundamentally tied into exporting commodities to China,” Mr Bloxham said.
“Our house view is China has got the capacity and the levers to be able to pull and continue to maintain the sort of growth rates we’ve seen in recent times. And that their drive to do that is very strong.”Residential property prices continued sliding across Australia’s capital cities in the March quarter, according to the latest ABS statistics.
The Australian Bureau of Statistics (ABS) has released its latest Residential Property Price Index, reporting that in the three months ending 31 March, home values dipped 3 per cent across Australia’s eight capitals.
When assessed annually, prices fell 7.4 per cent from the March quarter of 2018.
The sharpest quarterly decline was reported in Sydney (3.9 per cent), followed by Melbourne (3.8 per cent), Darwin (1.8 per cent), Brisbane (1.5 per cent), Perth (1.1 per cent), Canberra (0.9 per cent), Hobart (0.4 per cent) and Adelaide (0.2 per cent).
Sydney also reported the largest year-on-year slump, with prices down 10.3 per cent on the same quarter in 2018, closely followed by Melbourne (9.4 per cent).
Hobart and Adelaide were the only capital to report growth when compared to the March quarter of 2018, with home values rising 4.6 per cent and 0.8 per cent, respectively. Values remained stable in Canberra over the same period.
Reflecting on the data, ABS chief economist Bruce Hockman said: “These results are in line with soft housing market indicators, with sales transactions and auction clearance rates lower than one year ago, and days on market trending higher.
“A continuation of tight credit supply and reduced demand from investors and owner-occupiers has contributed to weakness in property prices in all capital cities this quarter.”
However, property research group CoreLogic’s
latest Hedonic Home Value Index reported that in May, national dwelling values fell 0.4 per cent, which represented the slowest rate of decline since May 2018.
According to CoreLogic’s head of research, Tim Lawless, the improvement was primarily driven by lower rates of decline across Sydney (0.5 per cent) and Melbourne (0.3 per cent), which spurred the initial downturn in the housing market.
Mr Lawless said he expects the
federal election outcome, which signalled the rejection of the Labor opposition’s proposed changes to negative gearing and the capital gains tax, to help build on an improvement in sentiment across the housing market.
He also pointed to
APRA’s proposed changes to mortgage serviceability guidelines, noting that the removal of the 7 per cent interest rate buffer would improve access to credit, and in turn, demand for housing.
The CoreLogic analyst added that the Reserve Bank’s decision to
lower the cash rate would also help stimulate demand in the sector.