Here’s a prediction: with the April meeting of the Reserve Bank board due next Tuesday, interest rates — specifically, home mortgage rates — will be back in the news.
That’s been made certain with two of the big banks, the ANZ and Westpac going their own way on this sensitive question and revealing their own rate changes separate to what the RBA board decides. That’s a situation ripe for constant media speculation and analysis, and ideal for the usually slow period in the run up to Easter.
At the moment the betting is that the central bank will leave its cash rate at 4.25% next Tuesday. Some economists suggest that a rate cut could come at the May board meeting. So we face either a few days or, more likely, a month of building commentary about home loan rates and the RBA’s cash rate. We will get the usual stories about people doing it tough, etc, but little about the winners — those savers with billions of dollars in term deposits earning fat rates from the banks.
This week we have seen a strange media reaction to a minor report from Fitch Ratings on rising arrears in securitised mortgages (a small part of the home loan industry) and yesterday’s JPMorgan/Fujitsu Australian mortgage industry report which forecast “a seismic shift” for the home loan market with low growth in coming years compared to before the GFC. Well, it’s already here with home loan growth at that level now for a year or more. The RBA has even warned banks that this low level of growth in housing business will continue for some years to come.
Just one fact makes a mockery of all this media talk: according to the Reserve Bank, mortgage holders’ excess mortgage payments in the December 2011 quarter were as much as the amounts they were required to repay on their home loans. That rose from 80% in March of last year. In other words, mortgage holders are paying $2 for every $1 of repayments required by their lenders. That is not suffering because of high mortgage rates, that’s a conscious decision to cut the size of the debt, for whatever reason. It’s actually a switch in investment from shares to saving and property.
It also means that if the mortgage holder becomes unemployed or suffers a loss of income, they have a much larger buffer to fall back on.
In addition to this, the RBA has again warned the banks not to take more risks by trying to avoid this slow growth outlook by cutting credit standards. In fact, the RBA has issued two warnings in the past month or so, with another from Dr John Laker, the head of APRA, the main bank regulator.
But does all this constant media speculation matter? The latest RBA’s Financial Stability Review suggests the media and others are largely wasting their time, newsprint, ink and the journalists’ efforts in trying to flog the “home loan shock” angle.
The review suggests many Australian home mortgage holders are in fact more interested at the moment in cutting their debt by paying off more than they have to, and making one-off injections of equity (some $25,000 a year or more) rather than drawing down that equity as was the case a few years ago.
It’s all part of the delevering by consumers who, according to RBA figures, have sold around $50 billion in shares since 2008 (which helps explain the weak stockmarket) and invested around $210 billion in term deposits with the banks in the same time.
“The share of directly held equities in household financial assets is now almost half its pre-crisis level, at 9%, while cash and deposits account for 27 per cent, up from 19 per cent in December 2007,” the bank said. That is not to say, household debt isn’t high at 150% of disposable household income, but that’s down from the 154% peak only 18 months ago.
And, despite what you may hear or read from month to month, home loan arrears are not as high as some private surveys would suggest (such as the one from Fitch Ratings this week). These surveys look at arrears data on securitised mortgages, most of whom pre-date 2008-09 and are concentrated in the higher risk low doc or no doc loans which have now all but disappeared in Australia. Securitised mortgages form a small and decreasing proportion of the mortgage market in Australia.
The RBA’s observations also question the alarmist nonsense written by some “experts” who warn the current weakness in home prices will trigger a housing crisis here similar to the one seen in the US. They have been making these claims for years, while home mortgage holders have been doing the opposite: paying off their loans rather than suffering and going into arrears. It seems many home mortgage holders are smarter than the alarmists think and are really investing more into their houses, rather than less.It is a positive from the delevering that consumers are certainly doing at the moment, as evidenced by the current savings rate around 9.5%, where it has been for several years. That is around three times the savings rate in the US at the moment, and much higher than it was a year ago.
So rather than “more pain” or “no relief” from home loan interest rates for home owners with a mortgage, as the media and some social welfare groups would have us constantly believe, the real story is, as the RBA explains, quite different. The bank in fact says there is a continued pattern of many households choosing to repay their mortgages more quickly than required:
“Data from the latest HILDA Survey (Household Income and Labour Dynamics) from 2010 indicate that nearly 50 per cent of owner-occupiers with mortgages were ahead of schedule on their repayments in 2010, a slightly higher share than in the 2007 survey.
“Many borrowers are repaying substantially more than required: data from lenders suggest that the rate at which borrowers were making excess repayments on their mortgages increased over 2011. Total excess repayments were roughly the same as required repayments in the December quarter 2011, up from about 80 per cent in the March quarter.
“These data include regular excess repayments as well as any one-off excess repayments made as a result of salary bonuses and other irregular income. Given that most borrowers do not change their regular repayment amounts when interest rates fall, the reductions in lending rates in late 2011 would be expected to boost excess repayments even further.
“This would add to the buffers that some of these borrowers are building up, and thus their resilience to potential future setbacks to their income. Consistent with these mortgage borrowing and repayment trends, the rate of housing equity injection has increased over the past few years; on average, households have injected around 3 per cent of disposable income annually since 2008, compared with average annual equity withdrawal of 4 per cent of disposable income around the middle of the decade.
“While arrears rates on mortgages are still above average, they have eased a little recently, and remain low by international standards. The arrears rate for housing loans (on banks’ domestic books plus securitised housing loans) declined to 0.6 per cent in December, from 0.7 per cent in mid 2011.
“The non-performing rate for credit cards has also improved, falling from 1.4 per cent in June 2011 to 1.2 per cent in December, while the rate for other personal loans has been broadly unchanged since mid 2011 at around 2 per cent.
“While the aggregate mortgage arrears rate has come down recently, state-level rates have diverged somewhat. Securitisation data suggest that arrears rates on housing loans in Queensland and Western Australia have increased the most over the past few years. Many of the loans in arrears were originated between 2006 and 2008, towards the end of the period of rapid housing price growth in those states, which was followed by falls in prices.
“By contrast, arrears rates have declined from the recent peaks in New South Wales and Victoria. As a result, Queensland – particularly the areas in the south-eastern part of the state that rely on tourism, such as the Gold Coast and Sunshine Coast, and where unemployment is higher than the state average – is now more heavily represented among the regions in Australia with the highest mortgage arrears rates; a few years ago, New South Wales was more heavily represented.”
This isn’t to say that owning a home is not with financial and emotional pain and agony — it is, at times. Australian consumers are more cautious in the way they are saving more and spending differently. But they haven’t stopped spending (as solid offshore travel, car purchases, eating out and online purchases attest).
It’s another case of watch what Australians are doing, not what the experts say we are doing.