Australians in record loan spree as house prices soar

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Australian homebuyers are borrowing at the fastest pace in four years amid record prices, straining debt levels already among the developed world’s highest as interest rates are set to climb.

The value of new mortgage approvals jumped 25 per cent in November from a year earlier, the fastest annual pace since September 2009, to a record A$26.9 billion (US$23.8 billion), according to the statistics bureau.

Ten out of 29 economists surveyed by Bloomberg News forecast the Reserve Bank of Australia will raise its benchmark rate by the fourth quarter and the median forecast is for a 25 basis-point increase in the first three months of next year.

Consumers from Canada to Scandinavia are on a borrowing binge, taking advantage of cheap credit that in Australia has pushed mortgage rates to a four-year low and underpinned a rally in home prices to unprecedented levels.

Australians’ preference for variable-rate loans and investor demand for rental properties is setting the stage for delinquencies to rise as interest rates climb.

This could saddle banks with potentially profit-eroding impairments, according to Brian Johnson, a Sydney-based bank analyst at CLSA Ltd.

“As and when interest rates turn and unemployment rises, it’s going to be savage,” said Johnson. When rates climb by about two per centage points, “house price escalation stops and the quantum of repayment increases, putting pressure on borrowers.”

Average dwelling values in the biggest cities climbed 9.8 per cent in 2013 to a record A$614,367, according to the RP Data-Rismark home value index. Sydney led the gains, with a 14.5 per cent jump in prices last year to A$729,969, followed by Perth with an almost 10 per cent increase to A$618,248.

 

Most overvalued

Australia’s housing market was the fifth-most overvalued among countries in the Organization for Economic Cooperation and Development relative to rents, the International Monetary Fund said in a December report.

The leader is Canada, followed by New Zealand, Norway and Belgium. Prices in Australia’s biggest cities, home to two-thirds of the population, have risen 26 per cent since the start of 2009, according to the RP Data-Rismark index.

The nation has the most expensive housing market after the U.K. when prices are considered as a proportion of gross domestic product per capita, Fitch Ratings wrote in a report this week.

The survey compared Australia, the US, Canada, Japan, the UK, the Netherlands, “core” European Union and “peripheral” European Union countries.

Australia avoided the type of housing crash that other countries went through in the past decade.

 

Maintaining Repayments

Anecdotal evidence suggests about half of households that borrowed when rates were higher got ahead on their obligations by keeping repayments the same when they fell, the central bank said in its Financial Stability Review in September.

As more new loans at current low rates are issued, that buffer, which reduced the risk of delinquencies when borrowing costs rose in the past, will shrink, said James Zanesi, associate director for structured finance at Fitch in Sydney.

“In the current environment of increasing house prices and low interest rates, new loans are more of a concern,” Zanesi said.

“Over the past six to nine months, we’ve seen a strong prepayment rate driven by seasoned borrowers used to higher interest rates.

“This is not the case for new loans.”

The average variable home loan rate was 5.95 per cent as of Dec 31, the lowest since September 2009.

The central bank cut its benchmark by 2.25 per centage points since the end of 2011 to a record low of 2.5 per cent. Some 83 per cent of mortgages to owner occupiers are on variable rates, according to the statistics bureau, which doesn’t provide the data for investors.

 

RBA dilemma

The RBA is facing a dilemma as it seeks to balance soaring house prices with a cooling in mining investment, which helped Australia avoid a global recession.

The central bank in November projected gross domestic product will rise by a maximum three per cent this year, compared with as much as 3.5 per cent growth predicted three months earlier.

Treasury has forecast the jobless rate will climb to six per cent by July from 5.8 per cent now.

“The worst-case scenario for housing and banks is a rapid 150 to 200 basis points increase in rates at the same time that unemployment is rising,” said Michael Wiblin, Sydney-based banking analyst at Macquarie Group Ltd, adding that this isn’t a near-term scenario.

“That could push up impairments and hurt banking profits.”

Westpac Banking Corp (WBC), Australia & New Zealand Banking Group Ltd and National Australia Bank Ltd (NAB) said they ensure customers can maintain repayments when interest rates rise when assessing mortgage applications.

 

Bank response

About 71 per cent of Westpac borrowers are ahead on their home-loan payments, Supreet Thomas, a Sydney-based spokeswoman for the bank, said by e-mail. ANZ Bank in July raised its “sensitivity buffer,” the level of rate increases borrowers can tolerate, by 25 basis points to 2.25 per centage points, Stephen Ries, a Melbourne-based spokesman for the lender, said in an e-mail.

NAB verifies a borrower’s existing commitments and income before approving a loan, Nick Higginbottom, Melbourne-based spokesman for the bank, said in an e-mail.

Steve Batten, a Sydney-based spokesman for Commonwealth Bank of Australia, declined to comment citing the bank’s first-half earnings on February 12.

The average home loan size across Australia grew 10 per cent to A$436,002 in November from a year earlier, based on data from Perth-based Australian Finance Group Ltd.’s network of 1,800 brokers.

The average weekly wage expanded at less than half that rate to A$1,105 before taxes as of May 31 from a year earlier, the latest statistics bureau data show.

 

Mortgage ballooned

In New South Wales, with almost two-thirds of its population living in the state’s capital Sydney, the average mortgage ballooned by A$56,000 to more than A$529,000, the highest in the country, AFG said.

Western Australia, where 64 per cent of the population resides in the state’s capital Perth, saw its average home-loan size expand almost 8 per cent to A$436,000, according to the mortgage broker.

Sydney and Melbourne were among the 10 most unaffordable of 360 cities surveyed by Belleville, Illinois-based urban development consultancy Demographia, with homes costing nine times and 8.4 times the median income respectively.

As investors rather than owner occupiers continue to drive Australia’s home price increases, they are raising the loans’ riskiness, said Martin North, principal at data company Digital Finance Analytics, who has been partnering with JPMorgan Chase & Co. to produce mortgage reports for more than nine years. — Bloomberg