RBA confident in borrower resilience

In an address to the Urban Development Institute of Australia, Michelle Bullock, assistant governor (financial systems) of the Reserve Bank of Australia (RBA), discussed the potential risks associated with household debt levels.

Ms Bullock noted that over the past few decades, the debt-to-income ratio more than doubled, rising from 70 per cent in the 1990s to its current level of 190 per cent.

According to the RBA assistant governor, much of the increase was driven by an increase in borrowing capacity off the back of low interest rates and deregulation.

“Households have been able to borrow more, they have been able to pay more for housing,” she said. “One important driver of high household debt in Australia is, therefore, housing. There is very little debt related to non-housing loans such as credit cards or car loans.”

Ms Bullock went on to draw the link between the flow of credit and property values, noting that the sharp increase in residential dwelling values over the past decades was largely influenced by the availability of credit.

However, the assistant governor went on to note that the current decline in property prices, particularly in Sydney and Melbourne, has raised questions regarding potential risks to mortgage holders that may be falling into negative equity.   

Despite such concerns, Ms Bullock said the housing downturn is “not large enough” to pose a significant threat to stability.

“The question we are asking ourselves is, given the high levels of debt and falling housing prices, are there any significant implications for financial stability?” she said.

“The answer would be no at this stage – the impacts are not large enough to result in widespread problems in the financial sector.”

She continued: “This is not to downplay the financial stress that some households are experiencing. But most of the debt remains well secured against property, even with the decline in housing prices.

“Total repayments as a share of income remain steady and a large number of indebted households have built up substantial prepayments over the past few years. Broadly, the debt is held by households that can afford to service it.”

Ms Bullock stated that arrears rates, while increasing over the past few years, remain low, adding that banks are “well capitalised” and “resilient” to impairments as a result of recent credit tightening measures.

The RBA assistant governor added that loans at high loan-to-valuation ratios (LVR) and interest-only loans are “less common than they were”.

Ms Bullock’s observations were reflected in the Australian Prudential Regulation Authority’s (APRA) latest property exposure statistics.

APRA reported that there was a considerable fall in interest-only volumes and declines in high LVR issuance over the 12 months to 31 December 2018.  

New interest-only home loan volumes contracted by $38.6 billion (38.8 per cent), from $96.3 billion in the year to 31 December 2017 to $57.7 billion. The overall share of interest-only loans slipped to 16.1 per cent over the same period.

[Related: ‘Overstated’ housing downturn darkens RBA outlook]