RBA’s Glenn Stevens pours cold water on mortgage stress fears with affordability at 10-year high

RBA governor Glenn Stevens has suggested that Australian households are coping well with their mortgage repayments as part of his very well received “Lucky Country” speech delivered to the Anika Foundation Luncheon in Sydney yesterday.

Stevens says the amount of household income required to repay the median mortgage is at its lowest level in more than a decade, excluding the GFC blip.

In addition, a high proportion of households are ahead on their mortgage payments, while house repossessions have also fallen from their peaks in Australia’s two biggest housing markets, NSW and Victoria – with the national repossession rate standing at 0.15% compared to 2% in the US.

"Dwelling prices have already declined, relative to income, and it is in fact not obvious that they are particularly high compared with most countries. Housing ‘affordability’ has improved significantly; over 99% of bank-held mortgages are being serviced fully," he said.

Stevens presented this chart (below) to show that on average, households are spending about 22% of their disposable income to repay their home loan – the same amount they were paying in 2002.

The chart shows that housing affordability has been improving over the past two years – with Australian households coming under the most strain in 2008 when the percentage of household income to loan repayments peaked at above 30%.

The standard accepted definition of mortgage stress is that you spend 30% or more of disposable household income on mortgage repayments.

“As a result of lower house prices and therefore lower loan sizes, somewhat lower interest rates and a good deal of income growth, the repayment on a new loan on a median-priced house as a share of average income is now at its lowest for a decade (except for the "emergency" interest rate period in 2009),” Steven said.

“It is true that a low unemployment rate is a key factor helping here, but it is also true that the proportion of households that are ahead on their mortgage payments is also high – with some evidence pointing to over half – which would provide a buffer of some months for those households in the event a period of lower income was experienced.

"If we look at applications for possessions of dwellings, they have been running at about 0.15% of dwellings on an annualised basis. Such applications have actually declined since their peak in both NSW and Victoria, though they have risen over the past couple of years in WA and Queensland. In the United States the most comparable figure for repossessions – "foreclosures started" – peaked at over 2% of dwellings.

The conclusion to be drawn from this and other positive indicators (a banking system in good shape; the correct macroeconomic response to the GFC, demand from China rebounding strongly after the GFC among others) Steven said was that “ingredients” the RBA would look to as signalling an imminent housing crash seem, “if anything, less in evidence now than five years ago”.

Stevens said stress tests carried out over recent years showed that "even with substantial falls in dwelling prices, much higher unemployment and associated higher levels of defaults, key financial institutions remain well and truly solvent".

As a result of this upbeat assessment of the Australian economy and the resilience of the financial system highlighted in the speech, both Commsec and ANZ said the chances of rates being cut in August had dimmed even further.

Commsec chief economist Craig James said that on the question of whether housing is over-valued, Stevens' arguments show that he isn’t convinced, pointing to Stevens' observation that " the housing market bubble, if that's what it is, seems to be taking quite a long time to pop".

James also highlighted that in terms of bank funding vulnerabilities, Stevens said there are grounds for optimism, while also showcasing a number of developments that have worked to strengthen the Australian economy.

James highlighted this statement from Stevens in relation to the strength of the economy:

“Some of the adjustments we have been seeing, as awkward as they might seem, are actually strengthening resilience topossible future shocks. Higher – more normal– rates of household saving, a more sober attitude towards debt, are-orientation of banks' funding, and a period of dwelling prices not moving much, come into this category.”