Pressures on Australian households continue to grow, with debt levels rising, house prices falling and competition increasing.
Total Household Debt restated upwards to 200% of disposable income
In recent weeks there have been a number of data points which highlight the pressures facing the household sector. Household debt in Australia is extremely elevated and it was concerning to see the Australian Bureau of Statistics upwardly revise debt levels following the inclusion of new APRA reporting for Registered Superannuation Entities. This led to a further ~3% increase in household debt as leverage in Self Managed Superannuation Funds was fully incorporated. Now the ratio of household debt to disposable income has jumped to 200% (from 194%), one of the highest in the world.
House prices continue to slide in Sydney in January and have peaked in Melb.
Pricing data from CoreLogic continues to show that the housing cycle has turned. Home values in Sydney are continuing to slide in January (down 3% from their September highs) while Melbourne has now peaked. We expect weakness to continue given: (1) Macro Prudential measures; (2) Ongoing pressure on the banks to improve lax underwriting standards; (3) Fewer foreign buyers; (4) Concerns over the potential impact of the Opposition’s proposed changes to negative gearing and capital gains tax.
Housing credit growth slows while NBFIs take up the slack
RBA data shows housing credit slowed to 0.44% (m/m) in November, down from the peak of 0.57% in May. This is consistent with our forecasts for an ongoing slowdown in housing credit. While the banks are feeling the full impact of this tightening, some of the void appears to have been taken by the Non-Bank Financial Institutions (NBFI) where housing credit growth has accelerated to 20% (the highest level since 2007). Given APRA’s new powers to regulate the NBFIs and stricter monitoring of the use of bank warehouses we expect NBFI growth to slow. Within the Majors CBA is continuing to see its market share slip (as seen in its 1Q18 Trading Update). Although we are comfortable with below system growth at this stage of the cycle, in the past CBA has regularly used price (discounting) to address its market share losses.
The banks are battered and bruised – unlikely to improve any time soon
The banks have a challenging outlook as the housing market slows, NIM comes under pressure from competition and switching (Interest Only to Principal & Interest), offsetting improved funding. The Royal Commission is an area of material uncertainty, while mortgage mis-selling and responsible lending risks are a growing concern. We expect the Australian banks to continue to lag peers given regulatory risk and lack of leverage to global rates and growth. Order of pref: MQG, WBC, ANZ, CBA, NAB.
