Via Gareth Aird at CBA:
The resilience of the Australian housing market has been quite remarkable over the COVID – 19 period. A huge fiscal injection of cash into the household sector, coupled with cuts to interest rates, loan deferrals and some other key policies have all supported home prices through the pandemic. It is clear that price falls will end up being modest nationally. Indeed prices are rising now in most capital cities in line with a broader recovery in the economy (chart 1).
We updated our dwelling price forecasts in early September to look for a much smaller peak to trough forecast than initially anticipated (10% peak to trough fall initiallyexpected). And we articulated why we thought we would see a strong rebound in prices in H2 21. The risks to our revised forecasts are skewed to the upside andour home price model indicates strong gains could be imminent (chart 2). We will revisit our point estimates earlyin the new year.
When werevised our dwelling price forecasts in September other forecasters were sticking with their calls for prices to fall significantly. But since then most analysts have upgraded their forecasts for dwellingprices. The consensus view has now swung around to decent dwelling price rises over 2021.
Given the expectation for dwelling prices to rise,potentially quite strongly,in 2021 we think that it’s worthwhile looking at what that may mean for financial stability. Intuition would suggest that when houseprices rise briskly so too does debt. However, that is not always the case, particularly more recently. It is possible for dwelling prices to rise a lot faster than household credit (chart 3). In such circumstances turnover is often low and/or households with existing debt are focused on debt repayment.
New lending and dwelling prices
The flow of credit (i.e. new lending) has a clear impact on dwelling prices. More specifically, the annual change in the flow of credit has a close leadingrelationship with the annual change in dwelling prices by around six months(chart 4).
New lending is driven by the supply and demand for credit. Our internal lending data (latest October 2020) andthe ABS lending data (latest September 2020) indicates that new lending has picked up materially since May 2020. Indeed according to the ABS total new lending (ex-financing) was up 25.5% over the year in September. Lending has been driven higher by owner-occupiers and first home buyers(chart 5).New lending, excluding refinancing, adds to the stock of household debt. We expect new lending to continue to climb solidly over 2021with the demand for home loans underpinned by record low mortgage rates, particularly fixed rates, and rising prices which will pull in owner-occupiers, first home buyers and investors. We suspect it won’t be too long before rising prices and the expectations of further price rises sees an element of FOMO (fear of missing out) return.It is a natural response to interest rates going so low.
Household debt (i.e. the stock of credit) matters mostThe stock of household debt is simply all of the outstanding credit to the household sector1. Each month the RBA publishes credit aggregates (chart 6). The RBA splits the stockof debt to the household sector into a few categories: housing credit –(i.e. owner-occupier (60% of the total) and investor (33% of the total)) and personal credit (7% of the total).
The change in the stock each month is a function of the flow of newlending and the amount of debt repaid. The change in the stock of debt can look quite different to the flow of lending because of the impact of debt repayment (chart 7). As at September 2020, housing credit growth was 3.3%/yr (owner-occupier 5.4%/yr, investor -0.4%/yr).
Despite the solid lift in lending to owner occupiers (including first home buyers) the stock of credit is growing at a historically subdued rate because many households are using lower interest rates to accelerate debt repayment. For investors the amount of new lending is roughly equal to the amount of debt being repaid and the stock of debt has remained broadly stable month to month for the past few years. Whilst we do expect total housing credit to lift a little as growth in new lending will be a little faster than growth in debt repayment,it will not be significant enough to see credit growth accelerate in any meaningful sense.
For personal credit, the stock has fallen very quickly since March 2020. At September 2020 the stock of personal credit was down by 12.5%/yr. The main reasons for the acceleration in the decline in personal credit relate to the fiscal injection of cash into the household sector coupled with an enforced drop in spending due to restrictions. That combination has seen many households that carry personal debt reduce those liabilities. In addition there has been less new personal lending.
Housing equity withdrawal/injection
Housing equity withdrawal is the net cash flow generated by the household sector from transactions in housing assets and mortgage debt. In the period up to the global financial crisis (2001-2007) the Australian household sector in aggregate increased its mortgage debt by more than its net spending on housing assets (chart 8). This generated a positive cash flow that supported consumption. But the situation since then has been very different. Housing equity withdrawal has been negative (i.e. housing equity injection has been positive).
The rate of housing equity injectionhas eased a little more recently when measured as a share of household disposable income. But that is because fiscal stimulus has pushed household income higher. In levels terms it’s been broadly steady since Q4 19. In summary, housing-related transactions are a net absorber of cash flow from the household sector.
Lower mortgagerates have given households that carry debt a cash flow boost and the interest share of debt has fallen to its lowest level since1999(chart9). But households still need to repay the principal and many households are using lower interest rates to speed up debt repayment.
Household leverage, financial stability and the outlook
The benchmark indicator of overall household leverage is the ratio of household debt to household disposable income. It peaked in Q2 19andhas since inched a little lower(chart 10). Household credit growth has been soft and the recent lift in household income has pulled the ratio down.
In 2021 we expect household credit growth to step up a little(CBA (f) 4%/yr). But in a broad sense household credit growth will still be constrained. Whilst we expect record low interest rates to drive new lending higher, we believe the majority of households will use the lower rates to accelerate debt repayment.
Our internal data indicates that as at June 2020,65% of CBA customers with a home loan were ahead of repayments and 33% of customers were more than two years ahead of repayments (chart 11).
Recent comments from the RBA support the focus on debt repayment. In the RBA’s October Financial Stability Review it was noted that, “many (households with a mortgage) have responded to the increased uncertainty and any boost to their cash flow by increasing their prepayments”. Accelerated debt repayment caps growth in the overall stock of debt and is considered a favourable development from a financial stability perspective.
The economic outlook has clearly improved, consumer confidence is at a 7-year high and lending growth will lift.Indeed we believe the outlook for consumer spending is positive given the huge war chest of savings that have been accrued in 2020(see here).But we still think that indebted households as a collective will retain the mindset to use lower rates as an opportunity to accelerate debt repayment.
On our estimates the household debt to income ratio will move a little lower before the end of the year, before increasingly modestly over 2021 to settle around 185%-190% (just below its prior peak). As such, rising home prices and a lift in new lending do not pose a risk to financial stability in2021. By extension we do not think dynamics in the housing market will have any impact on RBA monetary policy decisions in 2021.
We think that the economy will be on a sufficiently entrenched path of improvement by the middle of next year that the RBA will need to either remove or increase the target yield on the 3 year Australia Commonwealth Government Bond (ACGB). It will be the economic outlook that underpins monetary policy decisions in 2021 and not concerns around the housing market or financial stability.
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