Landlord boom poses risk for Aussie debts

The boom in Australian buy-to-let mortgages that has helped fuel record household borrowing could be the next driver of bank bad debts rather than corporate defaults.

While business-loan losses were behind the biggest bad debt cycles in the past three decades, according to a discussion paper from the Reserve Bank of Australia, unprecedented borrowing by individuals and signs that the residential property market is coming off the boil mean that for banks the next one might be different.

Australians’ penchant for investing in real estate has been encouraged by a boom in prices and declining mortgage interest rates that have been driven down by a central bank seeking to ease the nation’s shift away from mining.

The result is a level of household indebtedness that’s now greater than in other developed nations and unlike the US and UK, it has risen to new highs since the 2008 global crisis.

Home prices across Australia’s capital cities have climbed 28% in the three years to September 30 with Sydney prices jumping 44%, according to CoreLogic.

Price growth is starting to slow and auction clearance rates have dropped. Home values may fall 7.5% by the end of 2017 amid increasing supply and weak population growth, Macquarie Group has said.

That will hurt landlords, who account for nearly half of all new home loans.

“In the past, corporate debt and commercial property defaults have led bank-loan losses,” said Kieran Davies, chief economist for Australia at Barclays in Sydney.

“Things may be different going forward because household leverage has jumped from an already extraordinarily high level as investors have poured into the housing market.”

Household debt as a proportion of GDP has risen to a record 134%, according to a note from Barclays last month.

Interest rates that have been pushed down by unprecedented monetary easing mean the risk of delinquencies remains low.

Aggregate non-performing loans are less than 1% of gross lending now, down from close to 2% in 2010 and a peak of almost 8 percent in the 1990s, according to the Australian Prudential Regulation Authority.

Regulators have also forced lenders to boost the amount of capital they allocate to cover losses on mortgages as they seek to improve the safety of the financial system.

A research paper published this year by the central bank illustrated that, while previous impairment episodes in the early 1990s and 2008-09 saw most losses incurred in business lending portfolios, personal and mortgage lending now comprise a greater share of banks’ books.

“We are certainly more worried on the household side rather than the corporates,” said Michael Price at AMP Capital Investors.