Get ready for an ‘explosion’ of household debt

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    An explosion in household debt is looming, according to the CEO of Judo Bank.

    Joseph Healy, who previously headed National Australia Bank’s flagship business bank, said Monday that it would be foolish to assume that interest rates will stay at record lows for an extended period of time. Healy told attendees of a Trans-Tasman Business Circle event Monday that one of his top concerns over the medium to long term was the “almost uncontrollable rise in household debt.”

    “We see it in the housing market. It almost defies logic,” Healy said. “The banks have been lending at six, seven, eight times disposable income, and loan-to-value rations have been climbing up. Now this is an economy that already, pre-COVID, had the second highest household debt ratio in the world. So you’ve got this huge explosion in housing asset prices, huge explosion in debt, albeit in a low-interest-rate environment. But to assume that a low-interest-rate environment is going to hold three years-plus from now, in an inflationary environment, is foolhardy.”

    Judo Bank targets small and medium enterprises, a market that is gaining interest from the majors, according to The Sydney Morning Herald.

    Mortgage lending has skyrocketed in recent months along with house prices. ANZ Bank reported last week that owner-occupier lending was not 55% higher than its average level during the five years before the COVID-19 pandemic.

    Although Judo focuses on business lending, Healy said he was concerned about the spike in household debt because any problems households faced with their mortgages would inevitably spill over into the small business segment, the Herald reported.

    The spike in mortgage lending has spurred debate about whether regulators will take action to cool the market through macroprudential policies. However, so far the Australian Prudential Regulation Authority has minimised that possibility. Healy pointed out, however, that APRA had stepped in during previous housing booms.

    “You’ve got to assume that we’re not far away from something similar,” he said.

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    Warren Hogan, Judo’s chief economic advisor, said that if investors started driving the property market, APRA could step in to take action “very quickly.” Recent data shows investor lending rebounding quickly, although the market is still being driven by owner-occupiers, the Herald reported.

    Gareth Aird, head of Australian economics for Commonwealth Bank, said the bank did not expect macroprudential policies until next year. However, he said there was a rising risk that they would be introduced sooner thanks to the growing role investors play in the market.

    The latest available figures from the reserve Bank of Australia show that Australia’s household debt was 180% of disposable income at the end of last year. That’s slightly below the previous record, according to the Herald. However, the debt figure has climbed steadily in recent years, the Herald reported.

    Ryan SmithRyan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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    Original Article