Moody’s Investors Service says that to the extent that the new mortgage rules implemented by the Australian Prudential Regulation Authority (APRA) cool growth in household debt and reduce mortgage risks, the measures are supportive of the sovereign’s credit profile.
Nevertheless, household leverage in Australia (Aaa stable) will continue to rise from already elevated levels. High household debt, only buffered by limited liquid assets, would amplify the economic impact of a housing downturn.
Moody’s analysis is contained in its just-released report entitled “Government of Australia – New Mortgage Rules Will Help Mitigate Housing Market Risks.”
At more than 120% of GDP, Australia’s household debt is the second highest after Switzerland (Aaa stable) according to the Bank for International Settlements. It is also by far the highest percentage in Asia Pacific, above New Zealand’s (Aaa stable) 94.4% and Korea’s (Aa2 stable) 91.6%.
While household debt does not pose a direct or immediate risk to the government’s balance sheet, in the event of an economic downturn, highly leveraged households would likely cut back on consumption spending more sharply than less leveraged borrowers, crimping economic growth and fiscal revenues.
Another source of risk for the sovereign relates to the large exposure of Australian banks to the property sector, with around two-thirds of bank lending going to households. Nevertheless, the banks’ strong capitalization and generally high financial strength significantly reduce the risks of a banking crisis and any related costs to the government.
As part of its announcement on 31 March, APRA introduced a cap on interest-only mortgages at 30% of new residential mortgage lending, compared to almost 40% of the outstanding stock. In addition, lenders will have to strictly limit interest-only lending at loan-to-value ratios above 80%, and provide justification for ratios above 90% on such loans.
The regulator also instructed lenders to ensure that growth in housing investment loans remains comfortably below the 10% guideline limit that it introduced in December 2014, and advised that any breach would prompt an immediate review of the capital requirements of the financial institution in question.
By imposing more spread-out repayment of mortgages, the new measures will raise recurring repayment costs for some households, potentially deterring demand. The new rules will also dampen the appetite for mortgages from buyers who would have relied on capital gains to pay back their debt.
Moody’s report concludes by saying that overall, the new measures will likely weigh on demand for property only at the margins. Household debt should continue to rise in aggregate, as low interest rates and expectations of continuing rises in house prices encourage purchases.