You can read this position verbatim in the RBA’s bi-annual Financial Stability Review (FSR), which they published today. (For the avoidance of any further doubt, I have also confirmed this directly with the RBA itself.) To quote the FSR:
“The Australian financial system remained resilient through the crisis period and, in aggregate, banks experienced only a relatively shallow downturn in underlying profits. The quality of banks’ housing loan portfolios has proven to be very high by international standards… There has been a more significant deterioration in the quality of banks’ business loan portfolios, particularly for commercial property, and this remains an area to watch closely in the period ahead.”
Before we return to the RBA’s analysis, it is worthwhile summarising the latest ABS population estimates for the 12 months to September 2009. Population growth remains remarkably strong at a developed-world beating 2.1 per cent per annum. Importantly, that is vastly higher than the 1.2 per cent per annum growth assumed by the federal government’s intergenerational report (IGR), which I have denoted in the first chart here with a dotted pink line.
The next chart shows the latest ABS estimates for net overseas migration. The current annual pace is 297,300 persons. In contrast, the IGR assumes that net overseas migration only runs at a flat 180,000 persons per annum between 2012 and 2050. I have illustrated the IGR forecast via the red star. You judge whether that sounds realistic given an ageing population and shrinking skilled labour force.
Now the RBA today has lavished us with some incredibly valuable analysis in its semi-annual Financial Stability Review, which is produced by Dr Luci Ellis’s team.
The first chart below shows Australia’s non-performing housing loans (blue line) in comparison to the US, UK, Spain, and Canada. Australia’s non-performing loans represent about 0.6 per cent of the total compared to nearly 8 per cent in the US. For the analysts out there, a loan is non-performing if it is either past-due (90+ days in arrears and well-collateralised) or impaired (in arrears or otherwise doubtful, and not well-collateralised) based on a definition provided by the RBA.
The FSR takes a close look at major bank profitability as defined by ‘return on equity’ (RoE). And this information provides plenty of ammunition for the big bank sceptics. According to the RBA’s analysis, the major banks’ RoEs are forecast in 2010 to be near all-time highs since 1986 (see first panel in chart below).
The FSR also reiterates a theme raised frequently here that the Australian banks’ lack of offshore exposures and focus on domestic housing helped insulate them from the GFC. To quote:
“The overall effect of offshore lending on Australian banks’ total [non performing assets] has been relatively small because overseas exposures only account for around one quarter of their assets. In contrast to many overseas banks, the major Australian banks did not aggressively push beyond traditional geographical or product markets over recent years to seek out higher-yielding, but higher-risk, assets. In New Zealand and the United Kingdom – which together account for about two thirds of total foreign exposures – the major banks’ balance sheets also contain a significant share of lending to the traditionally less risky household sector, albeit less than for their domestic operations. Reflecting their focus on domestic lending, most of the foreign claims of the Australian banks represent their local banking operations in New Zealand and the United Kingdom.”
The FSR goes on to offer up a bunch of fantastic information on the housing market. First, it shows us that household debt is growing at low rates compared to the recent past (see the left hand side panel of the chart below). In particular, the RBA comments:
“Total outstanding household debt has been growing at a much slower pace than in the previous decade.”
Next the FSR demonstrates that while household gearing has increased over time, leverage, according to the RBA, is very low at less than 30 per cent of assets (confirming what I have said here recently). Expanding on this subject, the RBA observes:
“[A]lthough the Australian household sector as a whole has become more indebted, it remains the case that there is only a small share of very highly geared borrowers.”
The FSR then proceeds to drill into household debt levels in much finer detail. In the next chart, the FSR tells us that in 2008 around half of all home owners had zero mortgage debt. Only 36 per cent of all households were indebted owner-occupiers (refer to the left hand side). And those borrowers ‘behind schedule’ represent just 0.6 per cent of all loans by value.
“In general, households appear well placed to meet their debt repayments. Based on the most recent HILDA Survey data, in late 2008 – a period when housing loan interest rates were at their highest in more than a decade – around 2 per cent of households with owner-occupier mortgages fulfilled two criteria indicating possible increased vulnerability: they spent more than 50 per cent of their disposable incomes on mortgage repayments; and they had an LVR of 90 per cent or more.”
These are sobering statistics for those trying to peddle the ‘bubble’ moniker. One finds this most frequently deployed by those who do not have the data and/or analytical equipment to understand the market.
