Further to my note below on today's debate with Steve Keen, you can download a full copy of the presentation here.
What I do not say in the slides, but will communicate in the presentation, is this: Keen mounts his housing market critique based on crude comparisons of mortgage debt to GDP, amongst a few other things. This is a pretty meaningless benchmark. If you want to understand the viability of debt levels, you can use two key measures: debt-to-assets ratios and debt-to-income. This is exactly what any intelligent investor would do when appraising a company’s leverage.
So what does this mean for Australia’s residential property market? The total value of privately-owned residential property is around $3.5 trillion. The total value of outstanding mortgage debt is circa $1 trillion. Australia’s mortgage debt LVR is therefore slightly less than 30 per cent--ie, incredibly low. But Keen ignores this.
Even when we only analyse home owners with mortgage debt, the average value of that debt relative to the value of their homes is about 50 per cent. Australia’s largest lender, CBA, has actually disclosed that the average LVR across its mortgage book is much lower—around 34 per cent if I recall correctly.
Okay, so this tells us that the absolute debt levels are not particularly high.
What then about Australia’s debt servicing ratios? Well, we know that total household interest repayments as a share of disposable income are only about 10 per cent today. This is exactly the same as what they were 20 years ago.
Secondly, we know that Australia 90 day mortgage default rate is around 0.66 per cent, or nearly one-tenth and one-quarter of US and UK levels. This is despite the fact that mortgage interest rates are considerably higher in Australia. And our default rates have always been lower than US and UK levels.
Given there are around 5 million borrowers out there, that suggests that less than 40,000 are in mortgage stress.
Finally, we can reflect on recent RBA analysis that quantified the share of borrowers with both mortgage debt greater than 90 per cent of the value of their home, and high debt service ratios. The proportion of borrowers with an LVR greater than 90 per cent and paying away more than 50 per cent of their disposable income to service those loans was less than 1 per cent. A tiny number. Even if you reduced the threshold to 30 per cent of disposable income the share of borrowers is just 3 per cent.
When it comes to housing, Steve Keen would not know his butt from his boobs.
