OECD gets grumpy with Australian housing policy as investor loans surge
In Australia’s cities, the escalation in housing prices continues to be a source of concern for policy makers. The challenges are interconnected. At some stage the RBA will start increasing interest rates which directly affects mortgage holders. The risk is that many over-indebted households will be unable to sustain their payments, causing loan failures, pushing demand down and driving prices lower. This is against a background where loans to investors has now reached 50.3% of the value of all loans in January.
The pop will be louder still, because the First Home Buyer cohort, for whom there is so much concern, saw their share of total loan values collapse to just 7.1% in January, down from an already poor 9.1% in December 2016, as the chart below shows.
To go straight to the dashboard and take a closer look at the data, click here.
It is easily observed that the total value of loans to first home-buyers has not been lower in any prior month in this series. At AUD1.933 billion, the total monthly value of these loans is the lowest in the series, coming at a time when the total value of all loans hit a new record. Housing affordability might be a theoretical consideration, but its also clearly a reality for many potential first home-buyers. They are, at least as a matter of perception, priced out of the market. Perception is reality, so that equates to a housing affordability crisis.
While the clash of Investors v First Home Buyers is creating a bubble that could pop loudly in the Australian economy, the bigger issue will be any round of inflation, interest rate rises and loan failures.
Those risks were the primary text of the OECD’s Economics Survey of Australia for 2017, released in March. Under a table outlining Australia’s ‘extreme vulnerabilities’, the headline is ‘Dramatic house price correction’ and the detail says ‘A large drop off in house prices could cut household consumption and increase mortgage defaults’.
As the OECD put it, “Low interest rates have supported aggregate demand but are also ramping up risk-taking by investors and driving house prices and mortgage lending to historical highs.” In part, they use comparative household indebtedness (all debt, not just housing related) to make this argument. As the chart below shows, Australia’s household debt levels are towards the top of the OECD rankings.
The OECD is never short on advice to its member nations, and this latest report on Australia is no different. Its primary recommendations, at least with direct relevance to housing costs are to ‘maintain tight macro-prudential measures’ and ‘facilitate housing supply increases through improved planning regulation’.
Although they occasionally use plain language, the reference to maintaining tight macro-prudential measures is a thinly veiled criticism, given the reference to low interest rates creating economy-wide risks. Essentially, the OECD’s argument is that monetary policy measures have failed the Australian housing market – evidence of which includes the rising proportion of loans being taken up by investors. But they are also implying that Australia’s controls on bank lending are proving somewhat ineffective in increasing the housing stock.
Their ineffectiveness leads the OECD to suggest housing supply increases can be brought about, but perhaps only through improved planning regulation. Well, that will help, whatever the specifics might need to be, but it wont be all that is required for Australia’s housing market to avoid a major default event associated with rising interest rates and declining real housing prices.
Writing in The Guardian in early March, Greg Jericho referenced the OECD’s world outlook, which surprisingly referenced Australia (among others), stating that “…past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn”.
But as Jericho rightly points out, the real problem is the extent of the average indebtedness of Australians, which for “…Housing debt is now equivalent to 132.2% of household annual disposable income – well above the pre-GFC peak of 113.1% in September 2008.” The chart below shows how this has risen.
In a rising interest rates environment, household indebtedness is a major issue because in the GFC, households were paying 11% of their quarterly disposable income on mortgage interest repayments. Currently the proportion is just 6.8%. That proportion will quickly rise when mortgage interest rates rise, especially as households owe more for their houses than ever before.
After nearly six and a half years since a rate rise, the first increase from the RBA is going to be a rude shock for some.