Australians grapple with debt hangover
The Reserve Bank of Australia frequently seeks feedback on the health of the economy. It might want to call the debt counsellors soon.
Australians are making more calls to financial helplines, amid three warning signs: mortgage arrears are rising, lenders’ bad debt provisions have i ncreased and personal insolvencies are near an all-time high.
“I don’t know of too many financial counselling services where demand doesn’t exceed supply,” says Fiona Guthrie, chief executive of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. “There are more people who have got mortgages that they can’t afford to pay.”
Australia’s households are among the world’s most indebted, amid a housing boom that has fizzled out in parts of the country, but is still roaring in Sydney and Melbourne. Though most are capably servicing their debts, a worsening of credit measures has seen executives and analysts take a more cautious tone.
Australians’ private debt has soared to 187 per cent of their income, from some 70 per cent in the early 1990s, encouraged by low interest rates.
“There’s so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it,” says Gareth Aird, economist at Commonwealth Bank of Australia.
Though most Sydney borrowers have plenty of equity in their homes as prices keep rising, that’s not the case elsewhere. In Western Australia, more than 10 per cent of mortgage holders have little or no equity buffer, said a Roy Morgan report last week. In South Australia and Queensland, 8 per cent and 7.2 per cent of borrowers respectively are in negative equity.
Lenders are watching t he indicators closely, as is the Reserve Bank of Australia. After a seven year bull run, annual cash earnings at Australia’s big four banks fell last year for the first time since the f i nancial crisis, said PricewaterhouseCoopers. At the same time, their bad debt expenses — for business and consumer lending — jumped 39 per cent to A$5.1 billion, the highest since 2012.
But the hardest indicator to track may be borrowers worried about making their next repayment. Counsellors at the National Debt Helpline are now getting calls even from property investors, says Guthrie. In the last quarter of 2016, phone calls to the service jumped 12 per cent on the previous year to an average 11,079 per month, she says.
It’s not time to panic. Banks’ losses still remain small by historical standards and are largely confined to mining areas, according to PwC. Some 77 per cent of customers at Commonwealth Bank were ahead on their mortgage payments as at June. “Pockets of stress appear manageable in 2017 given the prevailing low interest rate environment,” Citigroup banking analyst Craig Williams said last month.
The worst hit areas are in Western Australia, where 2.03 per cent of mortgages were in arrears, up 48 percent year-on-year, S&P said in December. In New South Wales, the strongest economy, mortgage arrears were up 11 per cent.
Australia & New Zealand Banking Group chief executive Shayne Elliott said in November that he saw “emerging signs of stress” in the economy, citing both households and small businesses. Citigroup’s Williams pointed to potential areas of concern in apartment construction and unsecured personal lending when he said “the credit cycle has turned” last month.
“These warnings have to be taken seriously,” says Harry Scheule, professor of finance at UTS business school in Sydney “A bust scenario may be unlikely, but it is within reach.” —