Australian Household Debt To Income Reaches Sensitive Level

Australia’s mortgage performance is likely to remain stable in 2012, despite signs that household debt to income has reached sensitive levels amid declining property prices. That’s one of the key take-away messages from a market briefing hosted by Standard & Poor’s Ratings Services in Melbourne on March 27, 2012. The briefing also heard from Standard & Poor’s credit analyst Vera Chaplin, who provided an overview of the housing market’s key risks, including weaker economic growth in China and falling property prices.

Data shows that Australian household debt to household income has risen significantly over the past few decades, from about 50% to almost 160%. Chaplin explained that a scenario of a rapid slowing in Australian GDP and a sharp increase in unemployment, together with a hard landing in China, may precipitate a more significant property correction. Potentially, this may lead to losses to lenders exceeding the losses recorded in the recession in the early 1990s. Nevertheless, she noted that this is a less-likely scenario, given Standard & Poor’s expects China to continue its growth at 8%, which supports a base-case scenario of GDP growth of over 3% in Australia, an unemployment rate below 6%, and an average 5% softening in house prices. What’s more, there has been an equity buildup by most Australian households and tightened underwriting practices by lenders and lenders’ mortgage insurers in the past few years, enabling households to better withstand a China soft landing. Standard & Poor’s believes that the current key drivers for default on house ownership in Australia are loss of income and significantly reduced household wealth.

For further information on these topics, see the report “China Soft Landing Would Moderately Impact Australia’s Housing Market” and “A Soft Landing In China Is Unlikely To Affect Australian RMBS” (both published on GCP March 7).

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