Despite interest rates sitting at record low levels, one-third of Australian borrowers have either no accrued repayment buffer or are less than one month ahead on their home loan repayments, leaving them very exposed to an economic downturn or rise in interest rates.
In its latest Financial Stability Review, the Reserve Bank has today explicitly set out how vulnerable many Australian families are with their mortgage repayments.
Although “aggregate mortgage buffers – balances in offset accounts and redraw facilities – are high, at around 17 per cent of outstanding loan balances or around two-and-a-half years of scheduled repayments at current rates”, the concern is that “those with minimal buffers tend to have newer mortgages, or to be lower-income or lower-wealth households”, the RBA warned.
Suggesting that they would be the most susceptible to a rise in interest rates or a job loss.
The central bank outlined the risk Australia’s mountain of debt and rising house prices pose to the economy.
“Vulnerabilities related to household debt and the housing market more generally have increased, though the nature of the risks differs across the country,” it noted in the report.
“Household indebtedness has continued to rise and some riskier types of borrowing, such as interest-only lending, remain prevalent.
“Investor activity and housing price growth have picked up strongly in Sydney and Melbourne.”
Debt has increased substantially as people have been forced to pay ever greater amounts for property in most of the major east coast markets, while income growth remains “weak”.
“Rising indebtedness can make households more vulnerable to potential income declines and higher interest rates,” observed the bank, which is bad news for the economy because “a highly indebted household sector is likely to be more sensitive to declines in income and wealth and may respond by reducing consumption sharply.”
In other words, if house prices fall, then households are likely rein in other spending, potentially stalling the economy.
However, the bank added that most people are currently coping with their repayments.
“Indicators of household financial stress currently remain contained and low interest rates are supporting household’s ability to service their debt and build repayment buffers,” the RBA soothed.
While the Reserve Bank remains concerned about the level of investor activity in the property market, it said regulators ASIC and APRA have taken action to let some steam out of the market and banks have hiked interest rates independent of the Reserve Bank changing the official cash rate.
“The major banks’ advertised margin between investor and owner-occupier lending rates has risen to around 50-60 basis points after narrowing during 2016,” the RBA observed.
“Furthermore, all of the major banks will have introduced higher IO [interest-only] pricing by April, resulting in an average IO premium of 18 basis points for owner-occupier loans and 15 basis for investor loans.”
That is clearly a welcome development for the RBA, given its observation that interest-only lending has been on the rise.
“Some types of higher-risk mortgage lending, such as IO (interest only) loans, also remain prevalent and have increased of late,” the report noted.
This followed a speech last week from the Reserve Bank governor Philip Lowe where he directly linked the rise in popularity of interest only loan to “taxation arrangements”.
A month before the federal budget and the Reserve Bank has clearly argued that the biggest domestic threat to Australia’s economy and financial stability is household debt and rising house prices.