- Buy-to-let boom helped drive household debt to 134% of GDP
- Previous credit cycles have seen corporate loans drive losses
The boom in Australian buy-to-let mortgages that has helped fuel record household borrowing could be the next driver of bank bad debts rather than corporate defaults.
While business-loan losses were behind the biggest bad debt cycles in the past three decades, according to a discussion paper from the Reserve Bank of Australia, unprecedented borrowing by individuals and signs that the residential property market is coming off the boil mean that for banks the next one might be different.
Australians’ penchant for investing in real estate has been encouraged by a boom in dwelling prices and declining mortgage interest rates that have been driven down by a central bank seeking to ease the nation’s shift away from mining. The result is a level of household indebtedness that’s now greater than in other developed nations and unlike the U.S. and U.K., it’s risen to new highs since the 2008 global crisis.
“In the past, corporate debt and commercial property defaults have led bank-loan losses,” said Kieran Davies, chief economist for Australia at Barclays Plc in Sydney. “Things may be different going forward because household leverage has jumped from an already extraordinarily high level as investors have poured into the housing market.”
Household debt as a proportion of gross domestic product has risen to a record 134 percent, the highest among 36 developed- and emerging-market nations analyzed by Barclays, according to a note from the bank last month. The developed-market average is about 74 percent. In contrast, Australian corporates had leverage of about 80 percent of GDP versus a developed-market average of 121 percent, the note said.
The bad debt cycle will turn at some point and a bank has to “make sure that it is strong, well capitalized and prepared to face it,” Andrew Thorburn, chief executive officer of National Australia Bank Ltd. said at a media conference Wednesday in response to a question on mortgage defaults. “I feel we are equipped.”
Interest rates that have been pushed down by unprecedented monetary easing mean the risk of delinquencies remains low. Aggregate non-performing loans are less than 1 percent of gross lending now, down from close to 2 percent in 2010 and a peak of almost 8 percent in the 1990s, according to the Australian Prudential Regulation Authority.
Regulators are warning of risks in the housing market. APRA is vigilant about any signs of deteriorating credit standards, Chairman Wayne Byres told a parliamentary committee last week. Risks to Australia’s financial stability continue to revolve around property markets, with those surrounding housing and mortgage markets higher than average, the central bank said in its semiannual assessment of risks to the financial system on Oct. 16.
Regulators have also forced lenders to boost the amount of capital they allocate to cover losses on mortgages as they seek to improve the safety of the financial system.
Home prices across Australia’s capital cities have climbed 28 percent in the three years to Sept. 30 with Sydney prices jumping 44 percent, according to CoreLogic Inc. Price growth is starting to slow and auction clearance rates have dropped. Home values may fall 7.5 percent by the end of 2017 amid increasing supply and weak population growth, Macquarie Group Ltd. said in a note to investors Oct. 9. That will hurt landlords, who account for nearly half of all new home loans.
A research paper published this year by the RBA illustrated that, while previous impairment episodes in the early 1990s and 2008-09 saw most losses incurred in business lending portfolios, personal and mortgage lending now comprise a greater share of banks’ books.
“We are certainly more worried on the household side rather than the corporates,” said Michael Price, who helps oversee A$156 billion ($113 billion) as head of Australian fundamental equities at AMP Capital Investors. “We’d actually like the corporates to gear up to invest and grow the economy.”