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economics@1
Presentation toPresentation toBank for International Settlements Bank for International Settlements
Markets CommitteeMarkets Committee
Housing finance in AustraliaHousing finance in AustraliaHousing finance in Australia
Saul EslakeSaul EslakeChief EconomistChief EconomistANZANZ
SydneySydney1919thth November 2006November 2006
www.anz/com/go/economicswww.anz/com/go/economicswww.anz/com/go/economics
economics@2
Housing is the most important form of wealth Housing is the most important form of wealth for most Australian householdsfor most Australian households
Land
Dwellings
Life insurance & pension funds
Shares
Other financialassets
Composition of household wealth, 2006
Other ‘real’ assets
Ownedoutright
Ownedwith
mortgage
Privaterental
State rental
Australian housing tenure, 2005
Source: Australian Bureau of Statistics.
economics@3
Investment in housing has traditionally been favoured by government policiesInvestment in housing has traditionally been Investment in housing has traditionally been favoured by government policiesfavoured by government policies
Interest payments on borrowings for owner-occupied housing are not tax-deductible, but neither capital gains on owner-occupied housing nor ‘imputed rent’ are taxed
Owner-occupied housing is typically exempt from land tax, and excluded from ‘assets tests’ used to determine eligibility for social security benefits and concessions
Most first home buyers are eligible for government grants and/or stamp duty concessions or exemptions
Historically, State housing authorities have constructed housingfor sale to eligible individuals, or have been willing to sell rental housing to tenants, upon favourable terms
Interest on borrowings to acquire investment properties (and other income-producing assets) is tax-deductible (including against other non-investment income – so-called ‘negative gearing’), property investors can claim tax deductions for ‘depreciation’, while (since 1999) capital gains on assets held for more than 12 months have been taxed at half the rate applicable to other types of income
economics@4
House prices have risen 141% in nominal terms, House prices have risen 141% in nominal terms, and 87% in real terms, since the midand 87% in real terms, since the mid--1990s1990s
Established house prices – State and Territory capital cities
-20
-10
0
10
20
30
40
66 71 76 81 86 91 96 01 06
% change from year earlier
Nominal
Real
Note: From 1966 through 1978, figures are for Sydney and Melbourne only; includes Brisbane from 1978 onwards; Perth, Adelaide and Canberra from 1980 onwards; Hobart from 1984 onwards; and Darwin from 1986 onwards. ‘Real’ house prices are nominal prices deflated by the RBA’s ‘trimmed mean’ CPI series or, prior to 1976, All Groups CPI. Sources: ABS; Real Estate Institute of Australia; RBA; Economics@ANZ.
economics@5
Real house price gains over the past decade have substantially outpaced those of previous decades Real house price gains over the past decade have Real house price gains over the past decade have substantially outpaced those of previous decades substantially outpaced those of previous decades
Australian capital city established house prices
0
50
100
150
200
250
1965-1975 1975-1985 1985-1995 1995-2005
Nominal
Real
% change
Note: See footnotes to slide 3.Sources: As for slide 3.
economics@6
Australian house prices have risen more rapidly than in many other comparable countriesAustralian house prices have risen more rapidly Australian house prices have risen more rapidly than in many other comparable countriesthan in many other comparable countries
Established house prices
75
100
125
150
175
200
225
250
275
300
90 94 98 02 06
1990 = 100
UK
Australia
New Zealand
US
50
75
100
125
150
175
200
225
250
275
300
325
350
90 94 98 02 06
1990 = 100
Japan
Singapore
Hong Kong
Sources: National statistical or regulatory agencies; Thomson FinancialDatastream; Economics@ANZ.
economics@7
The stock of housing has grown substantially over The stock of housing has grown substantially over the past 15 years ….the past 15 years ….
Housing completions
100
110
120
130
140
150
160
170
180
190
71 76 81 86 91 96 01 06
'000 units (annual rate)
Decadeaverages
Sources: ABS; Economics@ANZ.
economics@8
… but so has the number of households requiring … but so has the number of households requiring accommodationaccommodation
Sources of population growth
2.45
2.50
2.55
2.60
2.65
2.70
2.75
2.80
2.85
90 92 94 96 98 00 02 04 06
Number
(series break)
Falling householdsize has resultedin the creation of
over 500 000 morehouseholds than
suggested by 'raw'population growth
Average number of persons per household
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
90 92 94 96 98 00 02 04 06
Contribution to population growth(% pts per annum)
Natural increase
Net immigration
Sources: ABS; Economics@ANZ.
economics@9
Thus the supply of housing has barely kept pace Thus the supply of housing has barely kept pace with the increase in underlying demandwith the increase in underlying demand
Number of households and number of dwellings
Note: Dwelling stock estimates for 1991, 1996 and 2001 based on census figures; other years interpolated using completions data. Sources: RBA; ABS; Economics@ANZ.
Over the ten years to June 2005, the stock of housing increased by 1.26 million or 18%
– 1.44 mn new dwellings were completed during this period, but around 172,000 old dwellings were demolished
Over the same period, the number of households rose by 1.33 million or 20%
– faster than the increase in population (12.5%) because of falling average household size
In effect, the increase in the supply of housing was more than absorbed by increased demand
6.0
6.5
7.0
7.5
8.0
8.5
95 96 97 98 99 00 01 02 03 04 05
Number of dwellings
Number of households
Mn
economics@10
Since the early 1990s mortgage rates have halvedSince the early 1990s mortgage rates have halvedwhile real incomes have grown by 11½%while real incomes have grown by 11½%
Standard variablemortgage rate
0
2
4
6
8
10
12
14
16
18
82 85 88 91 94 97 00 03 06
% per annum
Nominal terms
Real terms
Average weekly earnings
-4
-2
0
2
4
6
8
10
12
14
16
82 85 88 91 94 97 00 03 06
% change from year earlier
Nominal terms
Real terms
Note: dotted lines show averages 1982-1992 and 1996-2006. Sources: RBA; Commonwealth Treasury; Economics@ANZ.
economics@11
‘Borrowing capacity’ for a ‘typical’ household has ‘Borrowing capacity’ for a ‘typical’ household has risen by at least 125%risen by at least 125%
Note: data are for the June quarter each year.Sources: ABS; Economics@ANZ.
Maximum borrowing by couple earning average male and female
earnings, repayments capped at 25% of gross income and 20% deposit
50
100
150
200
250
300
350
85 90 95 00 05
$'000
Since the early 1990s, average earnings have risen by over 60% while the standard variable mortgage rate has halvedThis has increased the maximum amount which a ‘typical couple’ can afford to borrow under standard lenders’ rules from around $135 000 in 1992 to $305 000 in 2006In practice the rates actually paid by borrowers have fallen by more than the standard variable rate, while the traditional ‘rules’ are much less rigorously applied
economics@12
Innovations in Australian housing finance since the early 1990sInnovations in Australian housing finance since Innovations in Australian housing finance since the early 1990sthe early 1990s
Entry of new types of lenders– in particular, mortgage brokers and originators, whose loans
are funded by wholesale lenders via securitization
Heightened competition among lenders– enhanced by reductions in transaction costs (eg abolition of
stamp duty on mortgages) and improved technology
Greater flexibility in the management of loans– new features such as flexible repayment schedules, interest-
only loans, ‘re-draw’ facilities, home equity loans, ‘offset accounts’ (allowing interest on deposits to be offset against mortgage interest), split (part fixed, part floating) loans
Wider availability of mortgage finance– higher loan-to-valuation ratio (LVR) loans, ‘low-doc’ loans
(requiring less disclosure of servicing capacity), ‘sub-prime’ lending, ‘shared equity’ loans
Easier terms for lending to property investors– elimination of interest rate premium on investment loans,
introduction of split-purpose loans
economics@13
Entry of mortgage originators and brokers has Entry of mortgage originators and brokers has heightened competition in the mortgage marketheightened competition in the mortgage market
Note: ‘other lenders’ include credit unions, life and general insurance companies and government agencies. Sources: ABS; Economics@ANZ.
Share of new housing finance commitments
0
10
20
30
40
50
60
70
80
90
100
81 86 91 96 01 06
% of total (by value;12-mth moving total)
Banks
Building societies
Mortgageoriginators
Other
Securitizations as apc of total mortgage credit
0
5
10
15
20
25
88 90 92 94 96 98 00 02 04 06
% of total mortgage credit
economics@14
Competition among lenders has resulted in a Competition among lenders has resulted in a further lowering of effective mortgage ratesfurther lowering of effective mortgage rates
Standard variable mortgage rate vs cash rate
Mortgage lenders’margins
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
92 94 96 98 00 02 04 06
% points
Standard variablemortgage rateover cash
Effective mortgagerate over cash
0
2
4
6
8
10
12
14
16
18
20
82 85 88 91 94 97 00 03 06
% per annum
Standard variablemortgage rate
RBAcash rate
Mortgage ratesubject to regulatory ceiling
Sources: RBA; Economics@ANZ.
economics@15
Australian households are repaying mortgage Australian households are repaying mortgage principal more slowlyprincipal more slowly
Mortgage repayment rate
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
% of principal outstanding (4-qtr moving average)
Sources: ABS; Economics@ANZ.
economics@16
As in the US, mortgage market innovations have As in the US, mortgage market innovations have allowed Australians to ‘tap’ their real estate wealthallowed Australians to ‘tap’ their real estate wealth
Mortgage equity withdrawal – US and Australia
-8
-6
-4
-2
0
2
4
6
8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
% of annual personal disposable Australia
United States
Sources: RBA; ABS; US Federal Reserve; Bureau of Economic Analysis; Economics@ANZ.
economics@17
The tax system has encouraged investment in rental property especially after 1999The tax system has encouraged investment in The tax system has encouraged investment in rental property especially after 1999rental property especially after 1999
Taxpayers with rental income Net rental income
Note: Data are for fiscal years ended 30 June.Sources: Australian Taxation Office; Economics@ANZ .
9
10
11
12
13
14
94 95 96 97 98 99 00 01 02 03 04
% of total no. of personaltaxpayers
Interest paid by property investors
2
4
6
8
10
12
94 95 96 97 98 99 00 01 02 03 04
$bn
-3.0
-2.0
-1.0
0.0
1.0
94 95 96 97 98 99 00 01 02 03 04
$bn
5052545658606264
94 95 96 97 98 99 00 01 02 03 04
% of total
Loss-making property investors
Capital gains taxrate halved
Capital gains taxrate halved
Capital gains taxrate halved
Capital gains taxrate halved
economics@18
Investment property lending grew rapidly Investment property lending grew rapidly especially after the 1999 tax changesespecially after the 1999 tax changes
Finance commitments to owner-occupiers & investors
Loans to investors as a pc of total commitments
10
15
20
25
30
35
40
45
50
90 92 94 96 98 00 02 04 06
% (trend)
0
2
4
6
8
10
12
90 92 94 96 98 00 02 04 06
A$ bn (trend)
Investors
Owner-occupiers(excl. refinancing)
Source: ABS.
economics@19
Borrowing for housing has grown rapidly over the Borrowing for housing has grown rapidly over the past fifteen yearspast fifteen years
Mortgage credit to households
-5
0
5
10
15
20
25
76 81 86 91 96 01 06
% change from year earlier
'Real'
Nominal
0
50
100
150
200
250
81 86 91 96 01 06
A$000 (trend estimate)
Average newmortgage
Note: ‘Real’ mortgage credit is nominal credit deflated by the ‘trimmed mean’ CPI. Sources: RBA; Economics@ANZ.
economics@20
As a result, both debt and interest payments have risen substantially relative to household incomeAs a result, both debt and interest payments have As a result, both debt and interest payments have risen substantially relative to household incomerisen substantially relative to household income
Household debt to income
0
25
50
75
100
125
150
175
76 81 86 91 96 01 06
% of annual disposable income
Interest payments to income
0
2
4
6
8
10
12
76 81 86 91 96 01 06
% of annual disposable income
Housing
Total
Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Economics@ANZ.
economics@21
Australian households now have relatively high debt-income ratios by international standardsAustralian households now have relatively high Australian households now have relatively high debtdebt--income ratios by international standardsincome ratios by international standards
50
75
100
125
150
175
90 92 94 96 98 00 02 04 06
% of annual disposable income
Australia
New Zealand
Canada
UK
US
Household ‘debt to income’ ratio
Sources: ABS, Thomson Financial Datastream.
economics@22
On the other hand, the value of household assets has also risen substantiallyOn the other hand, the value of household assets On the other hand, the value of household assets has also risen substantiallyhas also risen substantially
Household debt to assets
0
5
10
15
20
25
30
76 81 86 91 96 01 06
% of assets
Housing debt tohousing assets
Total debt tototal assets
Household gross and net assets
300
350
400
450
500
550
600
650
700
750
800
76 81 86 91 96 01 06
% of annual disposable income
Gross assets
Net worth
Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Economics@ANZ.
economics@23
High levels of household debt are concentrated High levels of household debt are concentrated among households who can service itamong households who can service it
Source: Bruce Heady & Mark Wooden, Income, Wealth and Joblessness: Insights from the HILDA Survey, Paper presented to “Sustaining Prosperity”Conference, 31 March 2005.
55% of households have a debt-income ratio of less than 50%
The median level of debt among the least wealthy 20% of households is just $2,000
– and they account for just 4% of total household debt
Only 9% of households have a debt-income ratio of over 400%
– about half of these purchased their home within the past five years
– no evidence (in 2002) that these households were reporting above-average levels of financial stress
Only 2.4% of households had debt-service ratios over 50%, and only 4.2% had gearing ratios over 75%
– only 0.4% exceeded both
0
5
10
15
20
25
30
35
0 1 -50
51 -100
101-200
201-300
301- 400
400+
% of households
Household debt to income ratios, 2002
Debt to income ratios (%)
economics@24
High levels of household debt are concentrated High levels of household debt are concentrated among households who can service itamong households who can service it
Note: Figures in parentheses show average weekly household disposable income for eachquintile. Source: ABS; Economics@ANZ.
0
2
4
6
8
10
12
14
Lowest 2nd 3rd 4th Highest Average
Interest (principal residence) Principal (principal residence)
Interest (other property)
% of disposable income
($263) ($518) ($790) ($1,125) ($1,886) ($915)
Interest and principal repayments as a p.c. of disposable incomes, by income quintiles 2003-04
economics@25
Two thirds of Australian households have little or Two thirds of Australian households have little or no debtno debt
Debt service ratio by age of household head, 2003-04
Source: ABS (unpublished data from Household Expenditure Survey; Economics@ANZ.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0 0 -<4
4 -<8
8 -<12
12 -<16
16 -<20
20 -<24
24 -<28
28 -<32
> 32
Household head aged < 55 Household head aged 55+
Million households
Debt-servicing ratio
economics@26
Total loan delinquencies and write-offs remain at extremely low levels Total loan delinquencies and writeTotal loan delinquencies and write--offs remain at offs remain at extremely low levels extremely low levels
Impaired assets and write-offs: banks
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
95 96 97 98 99 00 01 02 03 04 05 060.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50% of total assets
Total impaired assets(left scale) Write-offs
(right scale)
% of total assetsannual
Source: RBA
economics@27
Rising loan delinquencies largely confined to mortgage originatorsRising loan delinquencies largely confined to Rising loan delinquencies largely confined to mortgage originatorsmortgage originators
Major banks
Non-bank originators
Regional banks
Other banks
Source: S&P
economics@28
Despite the increase in ‘buyDespite the increase in ‘buy--toto--let’ housing let’ housing investment, rental markets remain tightinvestment, rental markets remain tight
Rental vacancy rate Median rents
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
86 90 94 98 02 06
% (4 qtr moving average)
150
175
200
225
250
275
99 00 01 02 03 04 05 06
$ per week (4 qtr movingaverage)
3-br houses
2-br units
Note: data are weighted average of eight capital cities.Source: Real Estate Institute of Australia.
economics@29
FixedFixed--rate mortgages remain relatively unpopular rate mortgages remain relatively unpopular in Australiain Australia
Fixed and floating mortgage rates
Fixed-rate loans asa pc of total new loans
4
6
8
10
12
14
16
90 92 94 96 98 00 02 04 06
% pa
Standardvariable
3-year fixed
0
5
10
15
20
25
90 92 94 96 98 00 02 04 06
% of total (12-mth moving average)
Sources: RBA; ABS; Economics@ANZ.
economics@
The proportion of mortgages at floating rates in Australia is high by international standardsThe proportion of mortgages at floating rates in The proportion of mortgages at floating rates in Australia is high by international standardsAustralia is high by international standards
0
20
40
60
80
100
120
Neth-erlands
France US Swe-den
Can-ada
NZ Italy Ire-land
UK Ger-many
Aust-ralia
Spain Fin-land
% of total
Variable interest rate loans as % of all loans, 2004
Source: OECD
economics@31
What goes up doesn’t necessarily have to come down ….What goes up doesn’t necessarily have to come What goes up doesn’t necessarily have to come down ….down ….
Some observers point to the fact that Australian house prices are now at record highs relative to incomes or rents
– and argue that, just as falls in share prices are often precededby periods in which price-earnings ratios have been unusually high, high ratios of house prices to incomes or rents mean that house prices must ‘inevitably’ fall sharply
This line of reasoning ignores a fundamental difference between the share and residential property markets
– no-one has a ‘natural long’ position in the share market– but in cultures where home ownership is strongly preferred
(such as Australia), the household sector does have a ‘natural long’ position in the residential property market
So long as interest rates remain at reasonable levels (and unemployment remains low) – so that currently marginal owners do not become forced sellers – people will not sell their own houses simply because they appear ‘over-valued’However the ‘structural’ price gains of the past 15 years are most unlikely to be repeatedAnd the increased presence of investors in Australian housing markets could induce greater price volatility