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Cliff? What cliff? Quality of the Housing Finance Loan Book still solid

For more than a year, there have been concerns the end of COVID discounted fixed price loans would result in a ‘mortgage cliff’ wherein borrowers would be forced to sell houses at discounts because they could not afford the new variable and higher interest rates. The risk of loan defaults and discounted sales is personal for some but could become ugly for the whole economy if house prices were to tank as a result. To date, there is little evidence of this problem materialising.

The economic ‘green shoots’ discussed elsewhere in this edition need nurturing. If they are to take hold, the economy must avoid any serious loan default problems arising, for house price stability and for banks and their efforts to support the economy with a stable liquidity profile. 

On this front there has been a range of positive information in the quarter.

Stats Count has been tracking the ‘mortgage cliff’ for some time, and the chart below will therefore be familiar.

Refinancing continues to accelerate, with the good news that mortgage holders largely appear to be managing the higher repayment costs.

Lisa Visentin reporting in the Sunday Age referenced RBA data revealing the majority of Australians have already moved from cheaper fixed rate home loans to more expensive variable rates. The data indicates that:

“…about one million Australians are paying a more expensive variable interest rate. This compares with 520,000 loans expected to roll onto higher interest rates in the second half of this year, followed by a further 450,000 loans next year.”

That is a very good beginning for what is a serious national risk.

Adding to this, the quarterly report from the banking regulator, the Australian Prudential Regulatory Authority (APRA) shows that as these households transition to higher cost loan facilities, they are not falling behind on their housing loans at any greater rate than in previous cycles. Non-performing loans as a proportion of outstanding credit was 0.76% in June quarter 2023, up slightly from 0.72% in March quarter 2023. That is entirely manageable.

APRA also advises that new loans are well secured with no significant change in the proportion of loans with high loan to valuation ratios (LVR). The share of new loans funded in the June quarter with a loan-to-valuation ratio (LVR) of greater than or equal to 80% was stable at 29.3% of the total.

This is a relevant but sometimes dubious measure because as First Home Buyers get invested, they routinely have exactly 20% deposit (and sometimes less). Their capacity to pay can be at question, but if they saved the money themselves, they will often have capacity to pay a little more because they no longer have rent to cover.

Lending with an LVR greater than or equal to 90% continued to decline, falling from 5.7% in the March quarter to 5.2%in the June quarter, which is its lowest level in the series to date. The prudential controls on home lending have created a collective buffer that sees less households at risk from falling value or an incapacity to make payments than at any time since this series began.

Posted Date: October 4, 2023

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