1) The first is that system-wide LVRs are meaningless, since it is only the vulnerable that count. To begin with, system-wide LVRs are not meaningless. They give us a picture of the health of the overall market. But I do agree that the distribution of LVRs is just as important, which is precisely why I included an explicit analysis of them in both my blog post and the presentation I used during the debate. To quote my post:
“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.”
I provided further detail on this analysis in the presentation itself. In particular, I showed this slide on the distribution of high-risk LVRs and DSRs:
2) Another critic claimed that you cannot compare household debt servicing ratios, which employ household income, with company debt servicing ratios, since residential properties do not produce cash-flows like companies. This is a profoundly confused assertion.
For the record, the borrower under a home loan is not the residential property. Just like the borrower in corporate debt world is not a company’s goldmine. The borrower is the company. And similarly the borrower (or ‘mortgagor’) in residential mortgage land is the home owner. The home owner is, therefore, the direct analogue of the ‘company’. The ‘assets’ of the home owner are firstly their human capital (ie, wealth and income earning potential), and secondly their home. The home loan is secured by both: it is full recourse to the individual’s wealth, and also full recourse to the property. So there are no errors with my example—it is a perfectly appropriate comparison. The only error is with the logic applied by my critic. And, for the record, residential property does actually produce cash-flow: it is called rent. In the case of home owners, it is known as imputed rents.
3) Finally, there is a fringe dwelling guy out there by the name of Kris Sayce (I don't think anyone actually reads his work, it just comes up in my google alerts!). Kris regularly lies to promote his work, which is affiliated with Bill Bonner and Dan Denning's otherwise respectable Daily Reckoning. Some recent examples include claiming that 'median' house prices are inflated by sales of ultra expensive homes. Unfortunately for Kris, this confuses a median with an 'average'. For a while there he then regularly tried to convince the world that RP Data and Rismark had dropped their hedonic index (!?), which was just another bald-faced lie. We have always published the same hedonic index every month, which is in turn used by the likes of the Treasury and the RBA in its Statement on Monetary Policy. Of course, Sayce has never retracted this claim. Finally, he alleged yesterday that I had said that “mortgage repayments comprise 10% of household disposable income.” This is yet another lie employed to attract attention.
What I actually said was that total household interest repayments as a share of disposable income were around 10%, which is exactly what they were 20 years ago. This is absolutely accurate.
Sayce goes on to reluctantly acknowledge this fact. But what he never tells his readers is that I presented direct data on household mortgage repayments as a share of disposable income in my debate with Steve Keen (refer to the chart below). And what do you know, the pink line shows that the long-term average is around 33%. Using this benchmark, housing affordability currently sits near its historic average. What is interesting is that affordability in the 2000s was actually better than it was in the late 1980s and early 1990s despite what we frequently read in the media.
This data also fundamentally undermines claims that households paying away more than 30% of their disposable income to service their repayments are in ‘mortgage stress’. Applying that rule, which the likes of the RBA have previously debunked, half of all Australian borrowers have always been in stress. But when we use much more accurate default rates, we find that only around 33,000 borrowers out of the 5 million borrower population are materially behind on their repayments.
