Regulators worried about housing debt - but not for the reason you think

Barely a week goes by without some mention of Australians' record-breaking household debt.

You've probably seen the headlines: we have more housing debt relative to income than just about any country in the world, which would leave us vulnerable if there were another global financial crisis or a property bust.

Yet despite all these concerns, and tougher credit policies from banks, the debt pile is still growing faster than income. It recently hit a new record high as a proportion of household disposable income, at 190 per cent.

Given the huge problems housing debt caused in countries like the United States in the global financial crisis, is it time to get worried about this?

Well, it would be foolish to dismiss the high level of housing debt as a non-issue. Clearly, borrowing that much money comes with risks for the households involved, and the banks lending the cash.

However, the latest round of big bank profit results also shows the concerns are not yet translating into more people getting into financial strife.

The proportion of customers falling behind on repayments was well below long-term averages, and UBS analysts say the banks' overall bad debt costs are at the lowest level since 1980.

Still, the Reserve Bank is clearly concerned. It said recently housing loans were its "core area of interest" in trying to maintain the financial system's health, and the banking regulator continues to clamp down on higher-risk mortgage lending.

But if so few borrowers are struggling, what is the RBA so concerned about?

The answer is that even though our very high housing debt doesn't look like it will trigger a banking crisis any time soon, all those people with super-sized home loans are probably being more frugal with their spending than they would be otherwise be. And that's holding back economic growth.

What is more, the situation looks likely to persist for a while. Why? Because getting out of debt will probably take longer than it did in the past, as households typically have larger loans, and their pay packets are growing much more slowly.

Saul Eslake, independent economist and vice-chancellor's fellow at University of Tasmania, points out that it used to be easier for borrowers to pay back the bank. They could rely on pay rises, so that inflation ate up a fair chunk of their debt over time. With wage growth that is barely ahead of inflation, the logical response from households today is to restrict their spending elsewhere.

"While I don't think households are cutting their spending to avoid the risk of defaulting, they are certainly restraining their financial behaviour in order to manage their overall financial position," Eslake said.

If interest rates were to rise, paying back the bank would take even longer, and people might need to cut their spending even more.

And it probably wouldn't take a large rate rise to have this impact.

Recent research from RBC Capital Markets found that a relatively modest 1 percentage point increase in mortgages would take average monthly loan repayments past previous highs of 2011.

So, the regulators' main concern is about the impact of debt on spending, rather than an imminent fear of mass defaults.

The headlines about Australia's mortgage debt also tend to overlook other important details. One is that net debt - which also includes savings accounts, or mortgage offsets - has not risen to the same extent that gross debt has lifted.

The RBA estimates that total mortgage "buffers" - balances in mortgage offset or redraw accounts that could be used to cover interest payments if the customer lost their job - are equal to about 17 per cent of all loan balances.

Another is that while debt has risen, so have asset prices, so the "net wealth" of households has risen overall (even if most of that wealth is housing).

None of this means we can relax and allow borrowers to gear up even more. On the contrary, it suggests that borrowers who can manage it should take the chance to pay down their loans while interest rates are low.

This story Regulators worried about housing debt - but not for the reason you think first appeared on The Sydney Morning Herald.