Mortgage holders know that in recent years the proportion of income needed to service a loan has increased significantly. Increased interest rates, coupled with the growth in the size of average home loans, mean more households are under mortgage stress than ever before.
While that is one of the key topics around the barbecue, what we may not know is that a recent IMF report indicates Australians devote a greater share of their income to mortgage repayments than in any other advanced economy!
As can be seen in the following graph at 16.3%, the average cost of servicing a mortgage in Australia is well ahead of Canada and a group of Scandinavian countries. Eek! This is not a sport for which Australia willingly seeks to be world champion.
Despite higher serviceability costs and the potential for further rate rises, housing finance loans written in August totalled $22.82 billion, up 2.2% on the previous month. On an annualised basis, the year-on-year decline continues to contract (-9.4% compared with a year earlier), continuing the trend toward positive territory on a lending front.
As the chart below shows, though it had its moments, it now appears the downturn in housing finance will be relatively short lived and significantly shallower than the peak to which it has responded.
While relatively stable over the past twenty-four months, the average size of a new loan ($593,486 in August 2023) is still well above the decadal trend, prior to the global pandemic. Due to increasing dwelling prices over the period since early 2020, the average loan size is around $50,000 above the pre-COVID trend. This is clear in the following chart.
Examining loans by purpose for owner occupiers, the total value of loans was $16.07 billion in August, up from $15.664 the previous month. On a monthly basis, the value of loans for all activities were positive, except for the purchase of new dwellings which saw loan values down 1.0%. In addition, the value of loans for each of the past four months have been consistently higher than the low point, recorded in January 2023.
We have reported in previous issues of Statistics Count the challenge facing mortgage holders as they move from a period that included COVID stimulus and related, low interest rate fixed loans, onto variable rate loans at what are currently higher interest rates.
The Reserve Bank of Australia’s Financial Stability Report has reviewed the current situation. It turns out the previously described fixed rate cliff is more of a staircase: there are risks, but they can be managed in an orderly fashion.
The data suggests an orderly transition to the higher variable rates is well underway and is progressing in a satisfactory manner. Since the first increase in the cash rate in May 2022, around 45 per cent of these loans (by value) have rolled off onto higher interest rates. The vast majority of these borrowers are opting for variable-rate loans.
What is broadly described as ‘loan quality’ appears to be in relatively good shape. The RBA report commented that the arrears rates for borrowers have recently rolled off fixed-rate loans have increased slightly from low levels. They are generally similar to arrears rates among other variable-rate borrowers.
For those borrowers yet to roll off fixed rate loans, the RBA notes this group do not appear materially riskier than those that have already rolled off.
The reasons for confidence include the fact the majority of fixed-rate borrowers are assessed to have sufficient income to meet higher loan repayments. As part of that, the RBA also notes that this group have substantial savings in part because they have benefited from lower interest rates during the fixed rate period.
While many unknowns remain, the August data suggests some stability emerging in housing finance.
