Australia's central bank has warned house prices could plummet in the event of a severe downturn.
A Reserve Bank (RBA) research discussion paper 'How Risky Is Australian Household Debt?' studied how Australia's high Debt to Income (DTI) ratio affected a number of economical factors.
Assessing how high household debt would affect households' consumption, the paper applied a scenario where house prices would almost halve, which it said was entirely possible given the past and current recession.
"The scenario involves employment falling by 8% and housing prices falling by 40%," authors Jonathan Kearns, Mike Major and David Norman said.
"We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the global financial crisis."
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- Discount variable for 1 year
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Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
They said the unemployment fall was comparable to what the country was currently experiencing, while the house price fall was extreme, but had been evidenced in other countries in the past.
"The housing price fall considered is more extreme than the 1990s (20% fall in real housing prices) and during the global financial crisis, but is comparable to falls experienced in countries that were heavily affected by the crisis, including the United States (32% fall), Spain (37% fall) and Ireland (55% fall)."
This scenario would also see a substantial fall in consumption of 12%, from peak to trough, which it said demonstrated consumption was more sensitive to a fall in house prices than an increase in unemployment.
"Roughly three-quarters of the consumption fall can be attributed to wealth effects, with the vast majority of this resulting from housing wealth," they said.
"For households over 40 years old, about 20% of the wealth effect is attributed to changes in superannuation assets. The rest of the fall in consumption is driven by income shocks.
"The fall in investment income, bonuses/overtime income and wage income are all of roughly equal magnitude."
The paper also found while Australia had a high DTI ratio compared to other developed nations, much of our household debt was held by those who wouldn't easily default on it.
"The losses are also low because debt tends to be held by households who are well placed to service it, consistent with previous research (particularly Bilston et al (2015))," they said.
"Highly indebted households tend to have lower estimated probabilities of unemployment and higher incomes.
"This means they are less likely to experience income shocks that will reduce their ability to meet mortgage repayments."
In addition to this, foreclosures in Australia are few and far between due to home loans accounting for most of household debt, which are well collateralised.
The paper said Australian mortgages had low LVRS by international and historical standards.
"For example, less than 10%of new Australian loans are written at LVRs above 90%compared to close to 50% of new loans in countries that experienced a boom-bust cycle during the financial crisis (Kelly, Le Blanc and Lydon 2019)."
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
- If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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