Australian authorities curb interest only mortgages

The Australian authorities have been looking to take the heat out of the property market amid concerns that prices were being pushed above and beyon

The Australian authorities have been looking to take the heat out of the property market amid concerns that prices were being pushed above and beyond the affordability of first-time buyers. Action has been taken to crackdown on more risky mortgage lending and recent figures suggest this is starting to take effect. Interest only mortgages, where capital is repaid at the end of the term, accounted for 30% of all mortgages in the second quarter which was a significant fall from the 36% in the first quarter of 2017. Total exposure to interest only mortgages fell by $2.3 billion in the second quarter according to information released by the Australian Prudential Regulation Authority (APRA).

Property, base rates and economic growth

It is sometimes easy to forget that we are living in economic times the likes of which we have never seen before. Australian base rates currently stand at 1.5% and while this is useful for economic growth it can lead to dangerous levels of speculation. For many people the problem is that savings accounts now yield negligible interest which is forcing those with excess cash to look elsewhere. As demand for property continues to grow, with acute rental property shortages in some areas, this is encouraging investment in “safe” real estate. The problem is that if prices are pushed higher and higher then buyers will be forced to take on more and more risk and when the market does “take a breather” prices could fall sharply.

As a consequence we can expect more curbs on lending in the short to medium term and attacks on foreign investment in Australian real estate, at least until base rates start to move higher. This in itself would be a major problem for the Austrian authorities. When base rates do eventually move higher this would take the heat out of the property market but also push the Australian dollar higher. This would reduce exports and have an overall detrimental impact on the Australian economy.

Long-term challenges

While the immediate reduction in interest only mortgages has been welcomed this is by far the end of the story. Household debt to disposable income is now standing at a record 194% in Australia and this is just not viable going forward. Even though many households will be able to cover low interest payments on their financial liabilities in the short term they will certainly feel more pain as and when Australian base rates increase. Therefore, we can expect more action from the APRA as it looks to deflate the house price bubble which has been growing for many years.

So far, in general, there has been some limited success in deflating the house price bubble without causing a stampede for the exit door. However, the subject of real estate, foreign investment and base rates are becoming more of a political football than ever before.

Conclusion

Like many countries around the world, Australia is finding it extremely challenging to balance the low base rate environment we live in today whilst controlling more risky investment funding. An ongoing reduction in interest only mortgage arrangements would certainly be useful, and take some heat out of the Australian property market, but more action will be required by the regulators. In reality it is only once Australian base rates begin to rise that we will see any meaningful falloff in “risky investment” finance but increasing base rates too early could tip the Australian economy into recession.


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