RBA warned of over-stretched mortgage holders

Documents released by the RBA under freedom of information laws show the central bank is concerned about households who took out loans in the period between 2004-2007, when property prices were at their height, fearing they may be “overstretched”.

The release of the documents comes just weeks after separate data indicated that many households who purchased homes in the last decade actually returned to renting, prompting fears they had taken out loans that were too large to service.

The documents show the RBA was told in March that there are a number of problems facing the housing market, with a number of areas facing a higher level of arrears.

“Even though the pace of debt accumulation has moderated in recent years, aggregate household indebtedness and gearing remain around historically high levels,” it was told.

“This means some households could be exposed to shocks to their incomes and financial circumstances. A continuation of the recent borrowing restraint would thus be a welcomed development, as it would add further resilience into household balance sheets and avoid a build-up of risk in the household financial position.”

It was also told that the rise in arrears in Queensland was occurring well before the Queensland floods, “and is consistent with the higher-than-average unemployment rate and weaker property market in the state”.

These findings gel with a separate report from the RMIT Research Centre of the Australian Housing and Urban Research Institute, which found that 20% of home owners who bought a property between 2001-09 actually dropped out of ownership at one point, suggesting some of these households found property too expensive to maintain.

Those findings also come after the big four banks expressed some concern over over-stretched households.

CLSA Australia analyst Brian Johnson says while arrears have remained low, Australian households still face incredibly high levels of debt.

“You have never seen indebtedness like you see it now. What we also saw was a dramatic increase in interest rates from the lows of 2008 and 2009. Over and above that, margins have increased by 125 basis points.”

“If you talk to mortgage insurers they will tell you loans don’t default in their first or second year, it’s after that, up to six years. We may be starting to see that now.”

Johnson says employment in some industries has remained shaky, pointing to the rise in unemployment two months ago. “Job security is an issue at the present time,” he says.

However, the RBA was also told that households are handling that debt quite well. Experts say the level of arrears has remained quite low, helped by the banks’ tightening of lending standards and strict LVRs, and note it will continue to do so if employment remains high.

Johnson says as long as employment remains high, mortgage arrears will stay in check, but he notes many industries are suffering, and says ultimately it will come down to how the Government and Reserve Bank handle any housing crisis.

“If you were to get the start of a dramatic fall in housing prices, they would be aggressively cutting interest rates.”

HIA economist Harley Dale says he believes the industry is a “long way off” from any problem that would cripple the industry.