Reserve Bank governor Phillip Lowe has played down claims that more and more Australian homeowners are debt stressed and in trouble with their home loans.
Speaking in Melbourne last night after the central bank’s October meeting earlier in the day, Dr. Lowe pointed out that while loan arrears have risen in recent years, only “4% of borrowers” are underwater with their home loans – that’s where the value of their loans exceed the value of their houses.
In his remarks to the dinner, Dr. Lowe discussed the forthcoming Financial Stability Review from the central bank to be released on Friday morning. It will be the second of two reports for 2019 the RBA releases each year.
He pointed out that “over half” of that 4% were to be found in WA which has seen the collapse of home values in the past six years or so.
“Over half of these borrowers are in Western Australia where there has been a large and persistent decline in housing prices. So this is an area that bears watching,“ Dr. Lowe pointed out.
The remaining underwater mortgages are spread across the rest of the country, meaning the risk is scattered and not concentrated in the big states of NSW and Victoria. If the ‘more than half” of that 4% were located in either state, then the risks to the system would be much greater than they are at the moment.
Dr. Lowe also said that while Australian household debt was at high levels, “it has also built up substantial buffers.”
“All up, the balances in mortgage offset accounts and redraw facilities amount to 16 percent of outstanding housing debt. This is equivalent to around 2½ years of required mortgage payments at current interest rates.
“It is important to recognise though that this figure masks a lot of variation across households. We estimate that around a quarter of households with a mortgage have either no buffer or a very small one.
Yesterday’s board meeting examined the contents of the report and from what Dr. Lowe said in his address the financial system is much calmer and less stressed than it has been.
”..the resilience of Australia’s financial system has steadily improved over recent times. The core capital ratios of our banks are now well within the top quartile of banks around the world. Our banks are well placed to withstand a wide range of shocks and their position will be further strengthened as they meet requirements to increase their loss-absorbing capacity further over the next few years.”
But he did again wonder if Australian banks and other lenders had become too risk-averse.
“Lending standards have also been strengthened, although in some areas the pendulum may have swung a bit too far. It is important that our financial institutions support small businesses in particular. Lenders should not be so scared of making a loan that goes bad that they don’t provide the credit that the economy needs,” Dr. Lowe said in his remarks last night.
But Dr. Lowe did point to a source of potential problems. Just as falling interest rates offshore are adding to pressures on the Australian economy, financial system and monetary policy, so to the major source of future systemic risks is offshore.
“… internationally, there seems to be a disconnect between the uncertainty that investors feel about the economic situation and the compensation that they require for holding risk. Normally when people feel uncertain about the future, they want to be compensated for taking on risk.
“At the moment though, despite the uncertainty, credit spreads are low and asset prices are generally high. At our meeting today we talked about the possibility that a shock somewhere in the global system could cause a recalibration, leading to a disruptive repricing of risk.”