Growth in outstanding mortgage debt at historically low levels: Cameron Kusher

Every month the Australian Prudential Regulation Authority (APRA) publishes monthly banking statistics which include, among other things, the total value of outstanding loans on the books of Australian banks for owner-occupied housing and investment housing.

This information is published individually for every bank operating in Australia.

As at February 2013, domestic banks had a total of $1.147 trillion in mortgages on their books; at the same time RP Data estimates that the total value of all housing in Australia was around $4.85 trillion.

Over the month, 66.9% of all outstanding mortgage debt was for owner-occupier homes compared to 33.1% for investment homes.

Outstanding loans mortgage debt accounted for 63.1% of all outstanding loans of domestic banks.

The housing finance data published by the Australian Bureau of Statistics (ABS) each month includes the aggregated data published each month by APRA for banks, however, it also includes figures for all authorised deposit-taking institutions (ADIs).

ADIs include banks as well as building societies and credit co-operatives.

As mentioned, the total amount of outstanding mortgage debt to banks as at February 2013 was $1.147 trillion, to all ADIs it was $1.2 trillion.

The data shows that banks are overwhelmingly the most popular institutions for mortgages in Australia, accounting for 95.8% of all outstanding mortgages.

Of course, the banking sector in Australia is dominated by four major players: ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac.

These four major banks, excluding CBA’s subsidiary BankWest but including Westpac’s subsidiary St George, hold 85.1% of all outstanding mortgage debt by banks operating in Australia and 81.5% of all outstanding mortgage loans to domestic ADIs.

These figures indicate that more than four out of every five mortgages in Australia are to either ANZ, CBA, NAB or Westpac.

Over the past 12 months, the total value of outstanding mortgage debt to Australian ADI’s has increased by 6.0%.

This data set has been published from March 2002 onwards and this is close to the slowest rate of growth in outstanding mortgage debt on record.

Across all ADIs, 67.5% of outstanding mortgage debt is for owner occupation purposes compared to 32.5% of mortgage debt being for investment purposes.

What this data indicates is that investment borrowers are slightly more likely to go to a bank for a mortgage than they are to go to a credit union or building society.

Over the 12 months to February 2013, the total value of outstanding mortgage debt to Australian ADIs for owner occupation purposes has increased by 5.5% which is the slowest growth on record, compared to investment mortgage debt growing by 7.1%.

The higher rate of growth in outstanding mortgage debt for investment purposes reflects the broader ABS housing finance data which shows the value of finance commitments for investment purposes rose by 15.4% year-on-year to February 2013 compared to a 5.3% increase in commitments for owner occupation purposes.

The Reserve Bank (RBA) published some information in its recent Financial Stability Review, which supports the notion of slower growth in outstanding mortgages.

In the report the RBA specifically noted:

‘Contributing to the slower pace of credit growth is the fact that many households have been taking advantage of the lower interest rate environment to pay down their debt faster than required. Mortgage buffers – balances in mortgage offset and redraw facilities – are now estimated to be equivalent to around 14 per cent of the outstanding stock of housing loans (see graph below). When interest rates fall, not all borrowers reduce their mortgage payments, resulting in an increase in prepayment rates. The increase in the rate of prepayment as a result of the decline in mortgage lending rates since late 2011 is estimated to have reduced the growth rate of housing credit by around ½ percentage point over 2012. Measured a different way, in aggregate, households’ mortgage buffers are equivalent to around 20 months of scheduled repayments (principal plus interest) at current interest rates. This provides considerable scope for many borrowers to continue to meet their loan repayments even during a temporary spell of unemployment or reduced income. As with housing loans, households have also been paying off credit card debt; net repayments on personal credit and charge cards have been above average in recent years and balances on personal credit cards have also slightly declined since mid-2012.’

With borrowers paying off their loans quicker and having a greater ‘buffer’ sitting in their offset account it is no surprise growth in outstanding mortgage debt is at historic low levels.

Add into the mix, the fact that households continue to save around 10% of their disposable income and that the household debt to disposable incomes sits at around 150%, having plateaued over the past six year, and it is difficult to see how credit growth will return to previous levels in the foreseeable future.

This is despite the fact that we currently have a low interest rate environment and capital city home values have increased by 2.8% over the first quarter of 2013.

The challenge for the banking sector will, of course, be: how can banks attract new customers to lend to when this air of caution exists surrounding spending and high levels of debt?

The caution and aversion to credit is further highlighted by the fact that the RBA’s credit card statistics for February 2013 show that the average outstanding loan balance on credit cards fell by -2.5% over the year, the greatest year-on-year fall on record for that series.

Regulators will have to continue to ensure that lending practices and policies don’t deteriorate over coming years as banks seek new ways of attracting lending, particularly to the housing sector which accounts for 63.1% of the total value of outstanding loans to the domestic banks.

Cameron Kusher is senior research analyst at RP Data.