By Jill Fraser for Lending Central

Speaking on recent developments in the housing market the RBA’s Head of Financial Stability, Luci Ellis said a US-style housing crisis is unlikely in Australia because most of the heavy housing debt burden here is in the hands of those most able to afford it.

Talking to a residential property conference Ellis said today Australian housing debt is higher relative to housing assets than in the past.

While fewer households today buy their homes without debt, especially amongst the over-55s age group and more households in this age group have mortgages now than in the past, it is Ellis’ assessment that the increase in debt has broadly been concentrated in the hands of those generally more able to service it.

“It is not clear if that’s because they are not paying their original debt down as fast, or because they are not trading down as far as they used to,” she said.

Ellis maintains that the overall expectation is for the ratio of housing debt to housing asset to be higher now than in the 1970s and 1980s because the financial regulation of that period artificially restricted household borrowing. (For example, back then unmarried women found it hard get mortgages.)

“The question is whether this measure of leverage is higher (now) than can be sustained,” said Ellis pointing out that it is much lower than in the United States, even before their boom-bust cycle.

“But we should expect that to be true,” she said. “Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.”

Ellis notes that if the current benign picture of the financing of the housing market is to continue it is crucial that lending standards in the mortgage market remain prudent.

“Past experience has clearly shown that in the long run, you don’t improve housing affordability by easing lending standards. That just gets capitalised in the price.

“In fact, easing mortgage lending standards too far can be outright damaging to long-run affordability. This has been amply demonstrated in the recent United States housing meltdown,” Ellis said.

In Australia, lending standards never eased that far, and conditions didn’t get that grim.

APRA data reveals that only a minority of recent home loan borrowers started with a loan-to-valuation ratio above 90 per cent. The fraction of owner-occupiers with high loan-to-valuation ratios increased during the period when grants to first-home buyers increased. These buyers usually had smaller deposits than existing home owners and accounted for a larger share of new loans within that period.

Ellis notes that first-home buyers have long faced greater risk than more established home owners who have more equity in their homes. She states that there appears to have not been a drop in lending standards to first-time buyers, even when the First Home Owners Boost was in effect.

“Indeed, across the mortgage market as a whole, lending standards are a little tighter than they were a couple of years ago,” says Ellis.

“Banks and other deposit-takers have gained market share relative to non-bank lenders that tended to offer less conservative mortgage products and the banks themselves now have a more conservative profile in their lending than previously.

“Some lenders have reduced the maximum loan-to-valuation ratio they will offer for certain customers. The fraction of new loans with low documentation is lower now than even two years ago, both for owner-occupiers and investors. And although the share of interest-only owner-occupier loans has largely reversed its earlier dip, most of these are actually loans with offset accounts, which people use to pay their loan down faster.

In summary Ellis said that the global economic slump may still have a way to go and with consumer confidence still low financial conditions could remain tight for several years.

“Data suggests that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one. It will therefore be important for lenders to remain prudent in their standards.

“It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts,” concludes Ellis.