Why Australian mortgage growth has crashed

Last week’s mortgage credit data from the Reserve Bank of Australia (RBA) revealed record low mortgage growth on both a quarterly and annual basis (see below charts).

As I showed earlier this week, there is huge disconnect between mortgage growth and dwelling price growth, making mortgage growth a rather useless indicator for house prices:

I explained this disconnect as follows:

The reason why the correlation with mortgage credit is weak is because it measures two primary things: 1) the addition to the mortgage stock from new mortgages taken out by borrowers (increases the stock of debt outstanding); and 2) the repayment of mortgage debt by existing borrowers (reduces mortgage debt).

Only the first point – new mortgages created – actually impacts house prices. The second – mortgage repayments by existing borrowers – does not reflect new housing demand and does not impact prices.

Indeed, when interest rates are at record lows – as they are currently – we are likely to see mortgage repayments rise, which lowers mortgage credit growth, but doesn’t actually impact house prices. Similarly, many investors have been forced to switch from interest-only mortgages to principal and interest, meaning they are now lowering the stock of mortgage debt outstanding (other things equal) without adding to housing demand.

Yesterday, my contention was confirmed by the Herald-Sun, which noted that Australians are repaying their mortgages at record rates:

Mortgage customers are making massive inroads into their loans and optimising record-low interest rates…

Latest statistics from the nation’s largest bank, the Commonwealth Bank, found 77 per cent of customers are ahead on their loans.

And those who are in front are, on average, 35 monthly payments ahead of their scheduled repayments.

Fellow big bank National Australia Bank’s data shows 66 per cent of customers are at least one month ahead of their repayments.

On average, NAB customers are 38 months ahead of their repayments, including cash held in offset accounts linked to their loans…

NAB’s chief customer officer of consumer banking, Mike Baird, said borrowers should be optimising cheap mortgage deals by paying extra or tipping more cash into their offset account if they had one.

For this reason, MB prefers to look at the value of housing finance commitments (excluding refinancings) when assessing the housing market, since it only measures new mortgages and leaves out the noise generated by repayments:

As you can see, the correlation between housing finance and house prices has historically very much stronger.

Latest posts by Leith van Onselen (see all)


  1. The Horrible Scott Morrison MP

    Correct. Property owners are smashing through their mortgages and increasing numbers will own outright. Puts paid to the false narrative of property owners being debt slaves.

    • Why da fck would you pay off your mortgage now!!! Rates keep getting lower and possibly negative, it’s deflation in mortgage payments… this is the time to just keep it variable and take advantage of tbe lower ones to come….annnd globally rates never going higher! Austria sold 100 year bonds @1%…. flick those banks a penny on top of the monthly principal payments, why pay them interest on cash up here… paying of while rates were low in past was the right thing to do but world has changed now change with it, we all have caught up with Japan….

      • The Horrible Scott Morrison MP

        You Sir, are a true Australian. We need many more like you to serve your country by taking on cheap debt and beating those bankers at their own game. You’re so much smarter than them. You can definitely get rich from cheap debt and airline points.

        • Yeah dat rite!… I love tell’n people I told youzzz so…me smarter then da rest i know but Tks heaps….can now use all me points for a freebie flight on tiger air to Bali mate….. it’s a freekn no brainier!!

  2. Sorry, I don’t see why lower rates should induce borrowers to pay their mortgages off quicker. Higher rates, yes, but lower rates just lead to more refinancing ie a wash for outstanding mortgage credit.

    In addition the repayment of mortgages reduces the stock of money in circulation which is net deflationary for asset prices. The correlation may be weak because it doesn’t take account of a lag?

    • If borrowers maintained their payment amounts while IRs drop, then they would be paying off more principle, and thus pay off their mortgages quicker. So while the lower IRs may not ‘incentivise’ a change of behaviour, but rather ‘inertia’ would result in the faster pay down of debt.

      • just_the_pipMEMBER

        Bingo. We should expect this phenomenon to be the default outcome in an environment of falling IRs. Most punters will keep their monthly repayments steady

      • I don’t know the precise numbers but I guarantee you 90% or more of those with a mortgage would take the relief from lower IRs rather than pay the balance (savings) against capital. Banks don’t automatically offer that option either – you would have to specially request it.

        • So, this is a data question.

          Your intuition and mine do not align so let’s resolve with data

          We (n=1) have taken the low rate opportunity to maintain/increase repayments and shorten repayment period

          • The repayment period remains the same – all that changes is your monthly interest cost. The whole point of lower rates is to put more money in the pockets of those in debt so they can spend in the economy.

            Of course, there are those (Rudd’s tax reimbursement cheques) who will be sensible and pay down debt instead but that’s definitely not the policy aim. The vast majority will just be glad of the extra dollars.

          • Jumping jack flash

            Dominic, that’s probably their intention but it isn’t working.
            Instead, wages are being stolen and used to repay debt faster.
            Consumption and wages growth still in the gutter, despite the poor old RBA pumping their rate lever for all they’re worth

            This is likely one reason why the government hasn’t yet abandoned their failed “big Australia” plan to backstop the economy of infinite debt. Originally it was hoped that all these new 3rd world people without debt would come to this fine country, be paid a fair wage, find it insufficient to buy the things they needed, and then borrow trillions of new debt dollars into existence.

            But instead they were all enslaved and used to increase the debt of those already with debt. A far less effective outcome.

            But no. They are adaptable, our economic masters.
            Instead it seems as if we’re going into a slow melt scenario.
            We pretty much have the lowest interest rates there will ever be, +/- 1%, and not much to show for it by way of economic boom times, except instead of 30 years of surviving on HEM level debt servitude, debt slaves get to enjoy living at the HEM level for 20…

            again, not an ideal scenario, but I guess it will do.

        • “Banks don’t automatically offer that option either – you would have to specially request it.”
          My actual repayments have never changed when interest rates reduced. I have had to change them manually, and most people don’t.
          IO will change autoatically, but not PI.

          • You must have opted in to something there cause my mortgage rate has recently dropped and my monthly outgoings are less as a result.

    • extremely important point you made is overlooked.
      Repaying mortgages reduces money supply in the economy, ultimately leading to lower house prices

      • Unfortunately, that is not a link that is appreciated in the wider economic community. Not sure why. Perhaps it doesn’t comport with contemporary models

      • Money supply in economy = money in punters’ pockets plus potential new debt.

        House prices are propped up by cheap long term debt. You cannot get that for anything else to buy e.g. check out interest rates on car loans / leases, let alone credit cards.

        So less money in punters pockets (because they are paying off mortgage, have flat wages or whatever) impacts prices of everything else (except monopoly utilities etc) other than houses.

    • Move from IO to P&I not by choice but do – able.

      From Martin N I understood there are 30% of households that have all the mortgage debt.

      • Yes IO to PI is unavoidable but the way the article was written was that low rates induce higher repayments of capital. Lower rates and the switch from IO to PI are mutually exclusive events.

  3. I would have thought that growth is low because the volume of home sales is low. House prices can rise all you want, but if not many houses are being sold there isn’t going to be much credit growth.

      • house prices always grow on high volumes because prices are set on margin and there is significant underlying supply always present (divorces, estate sales, …). that’s also why house prices always fall on low volume

        Prices rising on low volume are just shot term irregularities.

        Have a look what happened in other places during boom and bust. USA is maybe the best case because of good data. During boom days number of homes for sale was rising but prices followed because of large number of sales. During bust phase number of homes for sale fell more than 50% yet prices crashed because very few were sold.

        Americans are smart so they don’t use “stock on market” numbers as an indicator but rather monthly supply number which is the ratio of number of properties for sale and number of properties sold in previous month. That number is still going up here despite less homes being offered for sale.

        Ultimately, it’s the number of buyers that sets the price

        • That’s just not correct doctorX. Prices rising on low volume is not necessarily an ‘irregularity’. At the beginning of the 2013-2016 boom volumes were value low and prices were rising.

          • @davey
            at the beginning of 2013 – 2016 boom new mortgages (financing commitments) were growing at 20% pa while now they are falling at -20% pa

            yes prices are rising now but that’s just a bull trap scenario of few people trying to get “rich” quickly
            that is a huge difference

  4. “”I don’t see why lower rates should induce borrowers to pay their mortgages off quicker””
    Maybe, short term effect! Hell if the MB theory was correct Aus would be debt free long since as interest rates fell. Fact is we are at record private debt.

    • Indeed.

      A bubble will never “voluntarily” stop growing – it will keep growing until it achieves its maximum growth potential.

      A bubble eats everything on its way to grow. When a bubble finally pops because there is nothing left in the economy to eat, it will leave one thing behind; total ruin.

  5. – This exactly mirrors Japan’s Balance Sheet Recession – people are scared of their debt levels – they are focussing on paying down debt rather than spending money on consumption and investment.

  6. So bot charts show the same – houses prices should not be rising. Second chart – finance commitments shows even bleaker picture because it’s at record low and it’s dropping fast

  7. Yeah, time will tell.
    This seems to touch on Keen’s theory of housing crashes. i.e. the paying off our debts will cause the contraction in the economy bringing about a housing crash.
    The longer you take to pay your debt, the more interest revenue earned by the FIRE sector that is then washed into every useless bedpan job. Start paying off your debts (or take on lesser debt than yesterday), whichever.. if I understand it right, as the sum of the two is continually decreasing, the fable goes, it will be the driver of the crash.
    So maybe you make a distinction between new mortgage growth and total mortgage growth but I wonder if Keen’s theory will play out, in that the economy may not make that distinction and will feed back into a crash of house prices.
    Again, keen to watch this play out!

    • Jumping jack flash

      This x 10000.

      Looking at what is happening around the world, then considering the trillions of nonproductive debt dollars in circulation, I think they’ve woken up that the interest on the nonproductive debt must be paid from productive activities.

      Cue the mad slashing of interest rates to zero, because there are hardly any productive activities left to pay the interest on all that nonproductive debt! Interest MUST be repaid, this is the foundation and definition of our financial system.

      While there is debt, there will be interest. As debt is repaid plus the interest, that money disappears! Gone! Nothing is there to replace it. This results in a contraction.

      the problem now is if it tips the other way too much. Say everyone repays their debt, banks will go broke and the economy will be ruined, unless we can replace the debt growth with actual growth.
      I am skeptical whether there’s enough productivity to replace all that debt growth.

      For example, has anyone ever used savings to buy a brand new Porsche SUV? No way. Far too expensive.
      Why and how can they ever be that expensive? Surely nobody can afford them, yet I see at least 3 on my way home from work every day.

      Well, you see, its easy, you just get a large pile of debt, and then….

    • Divya
      If the money paying off the debt (saving) was then directed to productive enterprise then the economy may not shring but, indeed, expand. However we are so far down this non-productive road, it is probably not possible to grow productive entrprises in this economy – your bedpan economy if you like.

  8. This is completely irrational:

    “NAB’s chief customer officer of consumer banking, Mike Baird, said borrowers should be optimising cheap mortgage deals by paying extra or tipping more cash into their offset account if they had one.”

    The low rate lowers the opportunity cost of using the money for something else. Low rates means you should be willing to reduce your repayments, and use excess cash to invest in stocks, or start a business, or go on a holiday, or take time off, or do more study. Because the opportunity cost of doing that is near zero.

    This isn’t happening though, because everyone is indebted to the max and are terrified of being caught when the tide goes out (which it is).

    Same story for business inventories dropping, and OML on the ASX crashing because businesses aren’t doing their discretionary spending on advertising anymore.

    • For most people, paying off the mortgage gives them the equivalent of a 6% return on investment pre-tax, and it’s risk free. The only reason they don’t pay off even more, is they can’t afford to.

      • Perhaps. Or they could be waiting for the arrival of NIRP so that they can make more money by keeping the balance higher….. it is worth a try I guess….. if only they can hang in there for long enough…..

    • “This isn’t happening though, because everyone is indebted to the max and are terrified of being caught when the tide goes out (which it is).”

      Um, financial flexibility has great value. Who could have known!?

      • It has been said in part, or in whole but less succinctly. Peak debt, killing the host, etc but Pettis has it:


        RBA knows it but only slips it into the narrative near the end of the process so they have an excuse ‘we can’t do everything with interest rates’ just lift asset prices (see Jackson Hole speech). The only salient question for anyone from here should be: ‘Can they really go negative? And what will it do?’. Fortunes to be made if you can figure out the second question ahead of time.

  9. Isn’t that last chart just a self fulfilling prophecy?
    As house price growth rises so to does the actual value of the house.
    That increases the mortgage size (especially in a flat wages growth society) which shows up a higher housing finance
    commitments. And visa-versa of course.
    If that is the case this chart tells you nothing

  10. Jumping jack flash

    Consider that everyone uses these lower interest rates to repay their debt.
    “Oh kaloo, kalay! Debt free and I have a house!”
    That’s fantastic! The economy is saved!

    But then consider that the main aim of all of this is to reduce the total amount of debt in the economy.
    “Oh kaloo, kalay, we no longer need to take on debt.” The economy is saved.

    Then consider when those people who took on the best part of a million debt dollars go to sell their house and cash in on all their hard work and sacrifice…
    “Hey, I bought this place for half a million debt dollars, it should be worth 5 million by now, but instead I can only sell it for 200K!! Might as well give it away! What happened to my turn to be rich?”

    • The sad thing is that when a shelter is used as a speculation vehicle you diminish the enjoyment of the shelter for its own sake. You lose something. I just want to be able to buy a house to paint the walls and put a picture up. It isn’t going to fit in my grave and enjoying the experience of being secure in my own place is all I have ever wanted. I see those that bought pre-boom have this crazy ego driven debt fest (cars, investment properties, big flat screens etc) but get themselves into a total depression about falling values because of their new (vanity/greed driven) level of debt. It would be completely comedic and farcical to the extreme (the image of a starving dragon withering away on its pile of treasure) but it becomes depressing when you realise they have changed their ‘values’ lens so the very thing they are fighting to keep is little more to them than a cardboard box filled with more or less money. It is a tipping upside down of Maslow’s heirachy of needs, where once shelter is established you could go on to do productive things. Instead, it just seems to cause anxiety and division in society between those who just want a home to live in, and those that want to be *rich*. Sadly, all that money is locked up in something that will never produce anything. Having a house post 1890 crash would have been so much better. No expectations of riches, just a home. If you want to be rich….go make something!

  11. Decelerating mortgage growth, by whatever driver, acts to reduce aggregate demand and will lead us into recession.