Housing credit a concern: RP Data

Rising debt levels are likely to be a cause for concern at a time when interest rates are so low, said Cameron Kusher

The consistent increase in housing credit should raise alarm bells with the Reserve Bank (RBA), according to RP Data research analyst Cameron Kusher.

The recent release of the May 2014 national housing credit data by the RBA confirmed that outstanding housing credit continued to increase at a moderate pace compared with the historic trend. Mr Kusher said this should be a concern with housing credit aggregates and the concurrent rise in household debt as more people are looking to purchase homes.

“If debt levels continue to rise, it is likely to be a potential cause for concern with households becoming more indebted at a time when interest rates are so low. When interest rates inevitably rise in the future, some households may find it harder to repay that debt,” he said.

The RBA publishes quarterly data on the ratio of household debt to disposable income. The latest data (up to March 2014) shows that the ratio of total debt is 149.9%, its highest since September 2010. The ratio of housing debt was recorded at 135.8%, which is its highest on record.

“One would think that this is the most problematic development for the RBA. Household debt levels are already high (much higher than public debt) and although household savings has increased over recent years, there has been no significant reduction in household debt levels and they are now rising,” said Mr Kusher. He also said he trusts that the RBA and APRA will keep a close eye on the issue.

The RBA’s financial aggregate statistics also detail the amount lent by domestic financial institutions. The latest data to May 2014 shows that outstanding credit grew by 0.4% over the month and is 4.7% higher over the year.

A breakdown of housing credit data over the 12 months to May 2014 shows that owner occupier housing credit increased by 5.2% and investor housing credit increased by a greater 8.3%. This was the greatest annual rise in owner occupier credit since March 2012. And for investor credit, the rise is the largest since August 2010.

Historically, the level of credit expansion is quite low, whereas over the past 20 years, the average annual increase in owner occupier housing credit was recorded at 11.3% and investor credit has averaged 16%. The annual change in owner occupier housing credit reached a recent low of 3.9% between January and March of 2013, which indicates that the recent rise has been quite strong, according to Mr Kusher.

Credit may ease over time as house prices are unlikely to continue to climb, according to BIS Shrapnel’s Residential Property Prospects 2014 to 2017 report.

The report states that that Brisbane and Sydney are expected to lead the capital city property market over the next three years, with values across all other capitals expected to decline in real terms by June 2017 due to low vacancy rates and “sizeable dwelling deficiencies” driving ongoing demand.

Meanwhile, Melbourne, Perth and Darwin markets are all expected to slow, impacted by weakening economies in the mining strongholds of West Australia and Northern Territory, and rising supply of new housing in the Victorian capital.