How serious is household financial stress?

From www.mpamagazine.com.au 22 February 2018

In a speech given on Tuesday at the Responsible Lending and Borrowing Summit, RBA Assistant Governor (Financial System) Michele Bullock addressed rising household indebtedness and mortgage stress.

“One of the key issues we have been focusing on is the extent to which rising household debt might presage stress in household budgets, with flow on effects to financial stability and ultimately to the economy,” she said. 

While house prices have been rising rapidly, particularly in Sydney and Melbourne, along with mortgage debt, incomes have been growing relatively slowly.

“The average household mortgage debt-to-income ratio has risen from around 120 per cent in 2012 to around 140 per cent at the end of 2017. Furthermore, the increasing popularity of interest-only loans over recent years meant that by early 2017, 40 per cent of the debt did not require principal repayments.”

Bullock noted that a large share of property investors have chosen interest-only loans because of the tax incentives, although some owner-occupiers have also avoided paying down principal.

“This presents a potential source of financial stress if a household's circumstances were to take a negative turn,” she warned.

Other analysts have also sounded alarm bells on the potential threats to financial stability.

“Static wages growth and rapidly increasing energy costs mean the average Australian household is finding it more difficult to meet their financial obligations and of course that includes mortgage repayments,” Mark Wizel, national director at CBRE, told Your Investment Property. “Should interest rates rise, some will find it difficult to hold on to their properties.”

Bullock concluded by saying that though there were some pockets of financial stress in Australia, the overall level of stress amongst mortgaged households was very low.

“The banking system is strong and well capitalised, and is supported by prudent lending standards,” she said. “The risks to financial stability from this source therefore remain low although we will need to keep an eye on developments. Appropriately prudent lending standards will continue to play an important role in ensuring that the financial system remains stable and households borrow responsibly.”