A silver lining in slowing mortgage growth?

by Manuelita Contreras05 Feb 2018
The potential for houses to be sold by older people with little debt to younger borrowers who take out more substantial loans could boost the country's mortgage growth, said JP Morgan analysts.

In a recent research note on Australian banks, the analysts said they see few reasons to be positive about mortgage growth in the country, but that there is one area where they see some potential upside: changes in demographics in homeowner ranks. 

“In particular, the potential for houses to be sold by older people with little or no debt, to younger people who take on more meaningful debt loads,” they said.

However, they were quick to point out that this upside could be offset by lower debt in the investor bucket.

The analysts said they see no reason why the trend of slowing mortgage growth will not continue given a number of contributing factors. 

They cited stretched household balance sheets, slowing house price growth, and general improvement in lending standards putting downward pressure on loan size as all playing a part in the slowdown.

Figures released in January put Australian total household liabilities at $2.466trn, an increase of 3% from the June 2017 figure after the Australian Bureau of Statistics revised its data to include SMSF debt.

Meanwhile, property prices have continued to fall, with Sydney recording steep declines. Property prices in the city have fallen for a fifth straight month with a 0.9% decline over January amid tighter investment lending rules, data from CoreLogic shows. At the national level, property prices fell 0.3% in January, with annual growth slowing to 3.2%, from 4.3% in December.

JP Morgan has revised its forecast for housing loan growth and now expects it to drop to 5% in FY18.

For FY19 and FY20, it forecasts growth to decline to approximately 4% and slightly below 4%. 

“We think this profile would satisfy APRA’s / RBA’s desire for a slowing of household debt, without bringing about a hard landing in the housing market,” said the analysts.

They noted that this level would also be slightly below nominal GDP.

Because of increased regulatory oversight, the analysts said they would not be surprised to see the average LVR of newly originated loans continue to go down slightly in coming years.

"Turning to the amortisation of the back book, we also think this factor will put downward pressure on loan growth in the next 2-3 years. A reduction in interest-only loans will increase the amortization rate on the portfolio," said the analysts.

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