Unless you happen to have won Lotto or had some other streak of financial luck, buying real estate for most people means taking on a level of debt. Mortgagee lending is big business for all the banks.
Across all the varied lenders, and currently that’s some 150, the value of outstanding owner-occupier and investor loans stands at around $1.44 trillion. Combined these institutions lend around $108 billion a year across a variety of loans including low-doc, interest-only and standard loans.
Changes in the demand for finance is closely linked to the health of the market. Taking a close look at mortgage and household debt more generally, right now strikes me as a sensible idea, given there’s so much market commentary being published, some of which relating to the apartment market, looks fairly extreme, even alarmist.
Against this background I’ve found myself asking the question: as homeowners and investors are we getting into too much debt and are households generally in danger of drowning in debt?
As part of it’s work the ABS Social Trends Series tracks household debt, however before looking at some of the ABS figures, recently Moody’s Investors Service released some figures and as a result one headline read: “Australians are falling behind on their home loans.” Which on first impression looks a bit concerning and so it’s worth seeing what the trends are.
The leading figure was that repayments more than 30-days in arrears had increased from 1.34% of loans to 1.50%. Based on the value of loans outstanding that’s a reasonable amount of money, hard to exactly qualify, but still a reasonable chunk of money that the banks would rather have in their hands and not as red ink on their balance sheets.
However, if we take a closer look at the figures all of the major markets, Sydney (0.91%), Melbourne (1.40%) and Brisbane (1.48%) are all below the top line figure of 1.50%. Perth is an exception at 2.13% and at the other end of the scale so is the ACT at just 0.82%. And on a state/territory measure both the NT and SA recorded drops in the level of arrears.
I’ve read in the past that a majority of Australians with home loans work very hard to make sure their payments are paid on time and that they will in fact manage other financial commitments and certainly delay any discretionary spending in order to meet home-loan repayments on time.
It is however worth making the point that since Jun 2015 the number of low-doc, and possibly higher risk loans, has been in steady decline, however over the same period the number of interest only loans has increased.
Given the spread and diversity of the property market across Australia, I do not think that the above figures indicate any sort of structural debt problem in the housing market.
This leads to another question and that’s about household debt more generally, how common is household debt, when and how much debt do we have and what are the trends and possibly flow-on to the housing market?
As the previous figures indicated we are a fairly conservative lot, but still according to the ABS around 70% of Australian households have some form of debit, usually headed by a home loan, and the good news is that only 1% of the population owe more than they own.
There is, as might be expected a sharp contrast between the levels of homeownership and mortgage debt between income levels with only 4% of low-income earners having a mortgage. In combination it is home loans and other property loans that dominate debt, and among the highest income groups, investment loans account for a greater proportion of debit than do home loans.
It is also worth noting that it is wage and salary earners that carry the majority of household debt, with a corresponding heavier weight of home loan debit, however it is the relationship between employment and debt that shows a particular trend.
Households with two or more incomes have a much bigger share of home loan and investment property debt than do one income households. This clearly shows the importance of two incomes in the property market, and confirms an often quoted trend.
And in today’s financial environment all of these trends would be more critical, further reinforcing the importance of dual incomes. The average term loan balance at June 2016 was $308,000 for loans with offset facilities, and $335,000 for interest only mortgages, and low-doc loans average $191,000.
When it comes to debt and that includes mortgage debt, age is, as might be expected another big factor with the bulk of debt being piled onto the household in the age bracket of 35-44, followed by the bracket 25-34. Another not surprising trend is that in the age brackets 55-64 and 65-74 plus, debt associated property loans other than a home loan are more dominant. And for Australian households, debt levels are rarely experienced for a lifetime, which I’m sure is a relief to us all, generally high levels of debt align to the periods of highest earning capacity.
Owning a Home with or without a mortgage
What I suggest is that the housing market looks very solid and these last few figures from the ABS I think further reinforce this view.
According to the ABS in 2012 – 67% of us either own our home with or without a mortgage, (its one reason when we talk about debt that more of us should be concerned about credit card interest rates). Among Australians 31% own their home outright, in the USA the figure is lower. While the proportion of households who own their dwelling with a mortgage stood locally at 37% which is similar to the USA at 36%.
The decline in outright home ownership among existing owners, may however be a fading trend as lower interest rates are generally credited with allowing established households to pay off their mortgage sooner, but we’re waiting for confirmation of this trend and that’s not much consolation for first time buyers. Generally considering these figures, I think that the indications are market looks healthy, despite the sometimes mixed headlines.