The Reserve Bank’s bi-annual ‘Financial Stability Review’ is always a good read for anyone interested in domestic and overseas economic conditions. The Review is focussed on assessing Australia’s financial system and any potential risks to financial stability. Working to ensure a strong financial system and efficient payments system is one of the key objectives of the Reserve Bank, so their commentary and analysis in this publication provides an important insight about how the RBA is reading domestic and global economic conditions.
For the time poor (or less interested!) a must read is the ‘Household Balance Sheets’ section which starts on page 37. One of the central theme’s running through the report is that Australian households are very much focused on saving; borrowing has slowed and is now more in line with income growth and households are choosing to repay their debt more quickly than required. The Bank is very much supportive of the higher household savings ratio (households, on average, are currently saving about 9.5% of their disposable income), and in fact is actively encouraging Australians to save save save!
The RBA attributes the higher savings rate to a number of factors.
Firstly, there is a large cohort of the population who are actively seeking to rebuild their wealth post GFC (real net worth per household has declined by 11½ per cent from its peak in 2007).
Secondly there has been a decline in the consumer appetite for risk which has resulted in a significant reduction of direct household exposure to equities (down from 18% in 2007 to 8.5% in 2012). In contrast, bank deposits as a proportion of total household assets have risen from 18% to 25% over the same period.
With regards to the housing market, the RBA have reiterated that dwelling values have stabilised over recent months and their view of future growth in home values is relatively sedate:
“While prices nationally have stopped falling in recent months, any future recovery is unlikely to produce housing price growth much faster than income growth, as was seen through much of the 1990s and 2000s, because that earlier period was one of adjustment to the structural decrease in nominal interest rates and liberalisation of the banking system.”
Importantly, mortgage arrears appear to have peaked and have retracted slightly from their 2011 high which was just above 0.6% to move below 0.6%. The rate of mortgage arrears is low by international standards but high based on the historical levels recorded in domestically.
The rate of mortgage arrears is highest in key areas of South East Queensland, with the RBA highlighting the Gold Coast, Sunshine Coast and Ipswich as regions where arrears rates have deteriorated. It is important to note that although mortgage arrears are comparatively high across these regions, the rate remains below 1.5% of all securitised mortgages.
The RBA also highlights that some areas of Melbourne may start to see higher rates of arrears over the short term.
“Although arrears rates on housing loans in Victoria are currently quite low, there is some chance they could rise, due to a potential oversupply of property in some segments, particularly inner-city Melbourne apartments and houses at the south-eastern fringe.”
From a financial stability perspective, the Reserve Bank is of the opinion that the residential mortgage portfolios of the larger banks are geographically diversified enough that there isn’t likely to be any level of distress on the financial system related to mortgage defaults or distress.
In summary, the latest Financial Stability Review provides a positive assessment of the Australian banking sector and household balance sheets. The international economy continues to provide some worries, however the RBA points out that that the banking sectors in areas outside the Eurozone are continuing on a gradual recovery. For Australian banks, international funding pressures appear to have eased and domestic deposits as a funding source are continuing to increase.
The RBA is very much satisfied with the level of household savings and is openly encouraging households to continue their prudent behaviour. That’s not great news for the retail sector or housing market, as greater savings implies less spending.
“Ongoing consolidation of household balance sheets would be desirable from a financial stability perspective, as it would make indebted households better able to cope with any future income shock or fall in housing prices.”
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