Australia land of the mega mortgage mug

As we know, Australian households are the second most indebted in the world, according to the Bank for International Settlements. Yet, this risk factor is often downplayed on the basis that the majority of Australia’s household debt is held by those most able to service it (i.e. high income earners).

CoreLogic has released data on mortgages originated at high debt-to-income ratios, which challenges this logic.

As shown in the next chart, the percentage of mortgages originated with a loan-to-income ratio of six or more hit a record high 10.0% in the September quarter of 2021, around double the ratio of early 2019 (left panel below):

Australian loan-to-income ratio

Highly-leveraged mortgage lending has boomed in Australia.

The percentage of new mortgage lending at debt-to-income ratios of six or more also rose to a record high 23.8% in the September quarter, up from less than 15% in early 2019 (right panel above).

CoreLogic notes that this “September quarter data captures the period just before APRA increased the serviceability assessment buffer for new home loan borrowers, which was enacted 1st November”. Therefore, the share of loans at high debt-to-income ratios would likely have fallen in the five months since.

Nevertheless, this data suggests that there is a large pool of recent mortgage holders that will be extremely sensitive to interest rate hikes, which the market is tipping will rise by 2.15% by June 2023.

If this was to occur, many recent borrowers would be in dire straits, mortgage demand would collapse, as would Australian property prices.

This is exactly why the market is wrong and the RBA won’t raise rates as early, swiftly nor far as the market is predicting. The consequences would be far too devastating.

Unconventional Economist

Comments

  1. The Traveling Wilbur ๐Ÿ™‰๐Ÿ™ˆ๐Ÿ™Š

    Is it dinner time for me already? I kept hearing this constant tintinnabulation of bells whilst reading this article.

  2. – Yep, every “specufestor” wanted to buy one of those “high end” “investment properties”, right ?

  3. – What’s the difference between “loan to income” and “debt to income” ??? I don’t see any difference.

    I consider any “loan/debt to income” ratio of 4 or higher to be “too high”. Period.

    • Loan to income refers to one instance only.
      Debt to income refers to the totality of loans for that person (think multiple ‘investment’ loans, personal loans, credit card debt and so on)

  4. Is it just me or does it seem odd that interest rates can be less than inflation rate? Unless we’re in some twilight zone.

    Simply put, if you were a lender, why would you lend at a rate that puts you at a loss?

    • Housing inflation would have to be well above the published inflation rate
      (house prices not included in inflation basket)

    • RatedAAAMEMBER

      Lenders only care about margin, for example they borrow money (via deposits etc) at a cost of say 0.80%, then lend it at 2%, keeping the 1.20% spread. They do make more money when rates are higher, as they can lend funds kept in transaction accounts/savings at higher rates and pay minimal interest on these accounts.

      • Jevons ghostMEMBER

        A lender borrows money at 0.8% and lends it out at 2.0%. Spread of 1.2%
        A lender borrows money at 5.0% and lends it at out 10%. Spread of 5%
        Who makes the more money?

        Or does it really matter anyway. Why do banks need to borrow at all, when they can whistle up money out of thin air by creating deposits to “lend” (or so I am informed)

    • Jumping jack flash

      I think for a debt economy to work properly the inflation rate must be higher than the interest rate otherwise how does the interest get paid?

      Then the system tries to catch itself, forever, creating infinite debt. Otherwise known as the bankers’ utopia.

        • Jumping jack flash

          There’s no reason it couldn’t work. They just need to accept several conditions, and they have a hard time accepting them.

          Economic theory hasn’t really caught up and we’re still all taught traditional manufacturing economy dynamics instead of debt economy dynamics which are of course completely different, but a lot simpler really.

          • Jumping jack flash

            The debt growth *is* the economic growth. All is debt. The money you get paid for working is someone’s debt, including the government’s debt, unless you’re lucky enough to work in export manufacturing, then its some other county’s debt.

            House price “growth” is just the difference between someone’s debt pile that gets handed to you when you sell a house to the pile of debt you needed to take out to pay to the person you bought the house from.

            The “problem” exacerbates as manufacturing is offshored and replaced by services and retailers of imported goods. But there isn’t really a problem, just a new set of rules that need to be accepted and followed, and one of those is the relationship between [price] inflation, interest rates and debt growth rate.

  5. The Travelling PhantomMEMBER

    I bet Martin North is producing truck loads of youtube now on the back of this information been a while since he was in the light spot

  6. Anyone who doesn’t max out their home loan is almost certainly falling behind their peers (unless they are some stock picking wiz)

  7. https://www.apra.gov.au/news-and-publications/apra-releases-quarterly-authorised-deposit-taking-institution-statistics-10
    The APRA stats came out yesterday for the December Quarter.

    CoreLogic notes that this โ€œSeptember quarter data captures the period just before APRA increased the serviceability assessment buffer for new home loan borrowers, which was enacted 1st November. Therefore, the share of loans at high debt-to-income ratios would likely have fallen in the five months since.”

    The opposite has happened to Core Logic’s quote above, the 6x income lending for the December quarter increased to 24.4% of new loans written.
    APRA, debt to income controls, where are you?

  8. Some of us are old enough to remember the names and faces of people who got wiped out in the crash of the early 1990โ€™s. Dr. Brendan Nelson said he decided to enter politics after being called out to a home where the owner had hung himself because he couldnโ€™t pay the mortgage.

    • The Traveling Wilbur ๐Ÿ™‰๐Ÿ™ˆ๐Ÿ™Š

      “hanged”

      Unless I’m misunderstanding your comment, which would make Brendan’s reaction even more extreme. PS Good bloke. Shame he decided to join the wrong party. But that’ll be Labor’s fault.

    • Early 90s? House prices around the level of a new car?
      He should have tried again, he had time, he would be a millionaire now.

      How it will work this time around is not so obvious. Or maybe it is.
      Mega money printing. Mega inflation. Zero interest rates. It’s happening already.
      It’s the only way. Either that or the system dies.

      • Jumping jack flash

        The only way. Indeed.
        Some may say that was the point of the COVID stimulus, or as i like to call it, the stimulus in the name of COVID.

        Since 2019 after the world hit the 0 interest rate bound, we have needed the inflation. The amount of (wage) inflation we have had over the past 15 years is totally out of synch with the amount of debt there is, and only possible due to the systematic cutting of interest rates (or equivalent shenanigans) each time the debt growth rate fell perilously low.

        Nonproductive debt is inherently deflationary because of the interest so the debt must constantly grow at some rate so the whole thing doesnt implode from the interest payments.

  9. Jumping jack flash

    In this debt economy where wages haven’t really been spurred on by [COVID] stimulus, basically because there wasn’t any effective stimulus provided, we rely on debt spending and debt growth to simulate a proper economy.

    Raising interest rates will affect this tenuous system in two obvious ways. Firstly, more demand and consumption will be redirected to servicing the interest payable on the two trillion dollarydoos that we all owe for our mortgages, instesd of being able to be used to pay people wages, etc.

    Secondly, you can be sure that at least some of the interest payable on that gargantuan two trillion dollar pile of outstanding mortgage debt is paid for by new debt that is created by the banks at the request of people who need it. If debt becomes more expensive, and wages continue to be stagnant due to the lack of wage-inflating stimulus spending (thanks, Scomo!!), then that new debt wont exist, so even more demand and consumption will need to be redirected away into interest than was before.

  10. ChristopherMEMBER

    I feel like such a mug with only a 1.5x debt to household income ratio, I need to be more of a goer.

    • Sounds like you need to attend a 3 Day IP Seminar and make friends with a mortgage broker with questionable standards. On both counts, there are plenty of options.

    • Jumping jack flash

      God-tier must be >6x household income.

      Mine is a little bit over 2x household, but I generally just use my income for these kinds of things, in which case its just over 3x

  11. adelaide_economist

    As far as I am aware, Steve Keen is still pushing the concept of a debt jubilee. These have historical precedent and while I doubt we will call ours such, policies which have a similar impact are likely to be pursued. All that will change is the skew of who benefits most depending on which party is in power when it gets implemented.

    • Please ask Steve if he is willing to make a bet on that. Tell him to get his walking shoes ready.

  12. I think inflation will be the chosen way out, with a little tax reform and minor falls in RE prices. To do anything else would be too painful. Savers and wealthy superannuants should be very concerned.

  13. Not by much. We’ll be relatively poorer as what are effectively debt payments gets distributed among us all.