With Australia’s property market going gangbusters, it is tempting to assume we are also increasing household debt as new borrowers gorge on cheap credit.
However, the numbers don’t support that idea – well, at least not yet.
It is true that new mortgage issuance was running at a record high in January, mainly driven by owner-occupiers who are trying to improve their surroundings after a series of COVID-19 lockdowns.
That is hardly surprising given that with stimulus money sloshing around the economy and housing loan rates at record lows, borrowing capacity is high even with house prices rising strongly.
Never been a cheaper time to borrow a million bucks
Using a current cheap three-year fixed loan with a comparison rate of 2.2% as an example, you can borrow $1 million with interest repayments of just $22,200 a year or $427 a week.
Even when you add in principal repayments, it is easy to see why housing buyers have become more fearless about raising prices, lulled by incredibly low interest rates that allow them to pay prices that would have been totally unaffordable just a few years ago.
It also indirectly shows why housing investors have not been following this stampede of buying, given that with interest so cheap there has been significant downward pressure on rents as renters decide it may be just as cheap to buy and overseas students disappear.
New buyers deeply in debt but existing ones are repaying
However, at the same time as this trend is happening, something equally interesting is happening to the vast bulk of existing home loans that the banks are holding.
People are paying these loans down – either directly or through mortgage offset accounts – keeping overall growth in the stock of mortgages outstanding running just above record lows set in January 2021.
Part of this may well be accidental given that many home repayments were set when interest rates were much higher, meaning that loans are effectively well ahead of their predicted repayment schedules as early principal amounts are paid off.
Much of it may also be deliberate, with tiny interest rates available on high rates of savings perhaps pushing many Australians to knock years off their loans instead by applying their extra savings to the loan.
Overall mortgage debt appears to be marking time
Whatever the reason, overall Australian mortgage debt is hardly increasing and at the same time, personal loans are also running at record low levels of around half of the peak recorded in late 2010.
The overall stock of personal loan commitments fell by 12.4% in the year to January – a much faster rate than the fall recorded during the Global Financial Crisis.
This may hold the key as to why the Reserve Bank of Australia (RBA) appears to be so sanguine about the current property boom, effectively adding more petrol to the fire by saying that interest rates will stay low for several years.
If Australian household debt is not rising and could indeed be falling when you take into account personal loans and credit card debts, then the fast rise in property prices may not be as dangerous as it seems.
Are the bond and share markets worried about nothing?
Interestingly, this also feeds into the worries on the share and bond markets that inflation is about to be rekindled and interest rates will be forced higher – something that is already happening on 10-year bond yields.
In some interesting research, National Australia Bank (ASX: NAB) downplayed fears of an inflation outbreak in Australia, pouring cold water on these concerns.
NAB economist Kaixin Owyong used a set of very optimistic forecasts for economic growth and employment and still found that inflation was unlikely to reach the RBA’s target band of 2-3% until 2024 at the earliest.
Difficult for inflation to rise enough by 2024
The analysis found that the Australian economy will take until at least 2022 to close the gap between its actual and potential output, with full employment unlikely to be achieved until at least another two years after that.
“In our view, spare capacity is likely to be broadly worked through by the end of 2022. This makes it plausible that the unemployment gap is closed in 2023 and inflation returns to the target in 2024, given the usual lags between activity, unemployment and inflation,” Ms Owyong said in the report.
“This accords with the RBA’s expectations [that] rates will be on hold at least until 2024, where it thinks it is highly unlikely [that] full employment and inflation at target will be achieved before then.”
Markets could be jumping at shadows
NAB’s forecasts upgraded its estimates of “full employment’’ and “potential GDP growth’’ in Australia – both measures that are closely looked at by central banks when they try to keep the economy running at optimal speed.
Even using these rosy forecasts, unemployment was estimated to be running too high by the end of 2022 to get inflation into the RBA’s 2-3% target.
That suggests that the bond and share markets may be jumping at shadows, although seasoned investors have learned the hard way not to push too hard against any market direction.