Reserve Bank of Australia steps up warning on household debt

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Reserve Bank of Australia
Pedestrians are reflected on a wall of the Reserve Bank of Australia (RBA) head office in central Sydney, Australia, October 3, 2016. Picture taken October 3, 2016. Reuters/David Gray

The Reserve Bank of Australia stepped up its warning regarding household debt.  It declared that one third of homeowners have not accumulated any mortgage repayment “buffer” which exposes them to income shocks, as well as increasing interest rates in the housing market.

It pointed that risks to household balance sheets and housing markets more generally have increased, varying from lending in Sydney and Melbourne which had become more risky and the stress that Western Australia and regional areas are currently facing. The RBA also noted concerns regarding an oversupply of apartments in Brisbane and Melbourne.

The reserve bank said regulators were geared to consider other measures to prevent risks if the recent crackdown on interest-only mortgage lending and bank lending standards fail to work.  Banks would assure investors that several borrowers were ahead of their mortgages, but the RBA argued that a third had only accrued a small “buffer.” The ones that belong to this population are those with lower incomes and wealth, and households with newer mortgages.

It further explained that aggregate mortgage buffers were high at least 17 percent of outstanding loan balances. That is around two and a half years of scheduled repayments at current interest rates according to the reserve bank. “However, these aggregate figures mask significant variation across borrowers, with available data suggesting that around one third of borrowers have either no accrued buffer or a buffer of less than one month’s repayments,” it added per the Australian.

The RBA has learned that most “highly indebted” households had a debt-to-income ratio that was above 550 percent and accounted for at least 35 to 40 percent of total household debt that poses risks of “financial stability”.  The most recent warning from the reserve bank builds on a co-ordinated push to cool the boom on Sydney and Melbourne, such as the Australian Prudential Regulation Authority’s new lending curbs. Last month, Australian Securities & Investments Commission chairman Greg Medcraft described the market a “bubble.”  Deloitte Access Economic estimated prices are 30 percent overvalued compared to incomes.

As far as the apartment market is concerned, the reserve bank said developers continue to report delays in the settlement amid low failure rates.  Valuations at settlement were usually below contracted purchase prices.  High vacancy rate in non-residential commercial buildings remains to be an issue in Perth and Brisbane. On other hand, the same markets continue to boost in both Melbourne and Sydney.

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