After a solid five years of rising house prices, across the nation, especially in Sydney, the boom is over. It has left the nation very much in debt, and while the Reserve Bank is mostly not worried, should our economy’s run without a recession come to an end, we will enter an economic downturn with households and the economy more susceptible to collapsing house prices than ever before.
The latest housing finance figures from the ABS confirm the findings of private firms that housing prices have been falling for some time now. In July, the value of housing finance was 8.3% below what it was 12 months previous – the biggest annual fall since the GFC:
The biggest reason for the fall has been the drop in investor housing loans – a fall that is largely policy driven as the Australian Prudential Regulation Authority and RBA sought to reduce banks’ exposure to risk.
While the value of owner-occupier housing finance is just 1.2% below its most recent peak, investor housing finance is 22% below its recent peak of December 2016 and 28% below its record level of April 2015:
Given the link between the growth of housing finance and house prices, we can expect house prices, which according to some measures have been falling for nearly a year, to continue to weaken for some time yet:
As ever, however, the picture is not uniform. The total value of owner-occupier home loans has fallen in New South Wales and is slowing in Victoria, while there has been a slight pick-up in South Australia and Queensland. Western Australia, on the other hand, has been going backwards now for more than three-and-a-half years:
You might think that we would see a fall in the average size of a home loan. But this has not occurred, because while the total value of housing finance has fallen, it has not fallen by as much as has the number of people taking out a home loan.
It has left us in a situation that even in NSW, where total owner-occupier housing finance has fallen by 2.7% in the past year, the value of the average home loan has risen by 5.3% to $463,200:
The increase in the average owner-occupier mortgage size in NSW since the RBA began cutting rates in November 2011 of 43% and 39% in Victoria would have many hoping that the bubble has well and truly popped. This is especially the case since in that time full-time earnings in NSW have risen by just 21%.
The problem with wishing for housing prices to fall is that it is a pretty harsh way to go about improving housing affordability. With that increase in housing prices since the end of December 2011 has come a very large increase in the debt levels of Australian households.
This aspect was noted in a speech on Monday by the RBA assistant governor, Michele Bullock.
Bullock noted that Australia has one of the highest levels of household debt in the OECD. She did, however, suggest one reason was that, unlike other nations, “the rental stock is mostly owned by households”. She noted that “Australians borrow not only to finance their own homes but also to invest in housing as an asset”.
But while there has been an increase in investment housing debt, the debt to income ratio of owner-occupier housing is also at records levels. The amount of debt held for owner-occupier housing is now larger than the amount of households’ annual disposable income:
Bullock argued that while our debt levels are high, the current low interest rates mean our mortgage payments are well below peak levels, and thus households are not overall struggling with the large debt:
She also noted that “the economy is growing above trend and unemployment is coming down”, and households have taken advantage of the low interest rates “to build prepayments in offset accounts and redraw facilities”. This is one reason why lowering interest rates rarely has as strong an impact on economic growth as raising them – many households keep their repayments the same as interest rates go down in order to pay off their mortgage faster.
It does suggest worries about a collapsing housing market might be not as great as it would seem given our level of debt. But largely that is because the economy has not had a major external shock for nearly a decade.
The overriding problem, however, is unless incomes begin to grow faster than debt, the ratio of debt to income will continue to grow, and that means when we do have our next economic downturn it will be at a time where households are in more debt than at any time in our history.
That is a precarious position to be in and why the lack of wages and household income growth during this recent period of solid economy growth is not only exacerbating inequality, it makes us more vulnerable should that growth come to a halt.
• Greg Jericho is a Guardian Australia columnist
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