Australian Households Building Mortgage ‘Buffers,’ RBA Says

Australian households are building mortgage “buffers” to help them withstand temporary unemployment or lower income, the central bank said, adding that tensions in Cyprus highlight global vulnerabilities.

Australian home-owners have repaid ahead of time about 20 months worth of scheduled loan payments, the Reserve Bank of Australia said in its semiannual financial stability review released in Sydney today. “Household indebtedness and gearing are still around historically high levels though, so from the perspective of their financial resilience it would be preferable if households maintained this more prudent behavior.”

Australia’s household debt-to-income ratio stands at 148 percent, compared with a record 153 percent in late 2006, RBA data show. That’s higher than the 133 percent Americans accumulated at the peak of the U.S. subprime mortgage boom, according to the Federal Reserve Bank of San Francisco.

The RBA said that while global financial conditions have improved “significantly” since its last review, renewed market tensions over the crisis in Cyprus highlight the political, social and economic challenges of resolving “pervasive” fiscal and banking problems.

“It is too early to say whether the improved market sentiment over the past six months is the beginning of a sustained recovery, or merely a temporary upswing,” the central bank said. “Much will depend on the European authorities’ ability to implement the policy actions needed to restore confidence.”

Cyprus on March 25 dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

Rate Cuts

The RBA lowered borrowing costs by 175 basis points in the 14 months through December, matching a half-century low of 3 percent, to help offset the drag on the economy from a high currency and to boost industries including construction as mining investment is predicted to crest this year. It kept rates unchanged at the first two meetings this year.

The Australian dollar was little changed at $1.0477 as of 11:38 a.m. in Sydney, from $1.0485 yesterday in New York, when it reached a two-month high of $1.0497.

The central bank said today that household credit growth has been slower in the past five years -- at an average annual rate of about 5 1/2 percent -- than in the 20 years prior. It said weaker demand for loans can pressure banks to compete harder to maintain revenue growth.

“From a risk management perspective, it is important that banks do not respond by imprudently loosening their lending standards,” the central bank said. “The available evidence suggests this is not occurring at this stage.”

Four Pillars

Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- named the so-called four pillar lenders for a law that prevents them from buying each other -- reported A$11 billion combined profit for their latest six-month results, little changed from the previous half, the RBA said.

Moderate Demand

“With domestic demand for credit likely to remain moderate in coming years, banks are increasingly pursuing other strategies to underpin their profit growth over the medium term, such as efficiency improvements and expansion in the Asian region,” the RBA said.

Australians’ savings rate held above 10 percent of disposable income in the nine months through December, compared with minus 0.1 percent in the first quarter of 2006.

Since the implosion of Lehman Brothers Holdings Inc., the Australian banking system has increased capital levels, cut its reliance on wholesale bond markets, and made greater use of deposits as a source of funding.

“Changes in the composition of the Australian banks’ funding over the past few years have left them in a better position to cope with disruptions to funding markets,” the RBA said. Lenders are also in a “good position” to meet Basel III capital requirements that began to be introduced in Australia this year, the RBA said.

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