RBA’s state of the nation: consumers don’t feel wealthy but mortgage is the priority

The Reserve Bank’s snapshot of the financial system has revealed that almost half of Australia’s homeowners are ahead on their mortgage repayments.

The report, released yesterday, says that about 50% of homeowners have enough cash to pay extra into their mortgages.

It also highlights that the pre-GFC drawdown on mortgages is over, and although debt-to-income levels are still high, very few people are “very highly geared”.

Westpac says the report shows Australia’s financial system is in reasonable shape, but there are also “a few ‘ifs’ and ‘buts’ expressed by the Reserve Bank.”

“Mortgage arrears have come down, but Queensland now dominates the regions with highest arrears rates. Business failures are also up, especially in ‘business and personal services’ sectors. And smaller property developers are under pressure due to “ongoing tightness in financing conditions.”

Here are some other take-outs from the central bank:

The household cleanse is helping prepare Australia for further shocks

It’s not helping retailers, but a household saving rate increase to 9.5% helps prepare the country for further shocks, the RBA report says.

“Growth in household income has exceeded growth in debt for the past few years. This has also been helping to underpin households’ debt-servicing capacity.

“Accordingly, aggregate measures of household financial stress remain low, though mortgage arrears rates are still somewhat higher than a few years ago. “

Australian businesses are healthier than a few years ago, but SMEs still sickly

Overall, the Reserve Bank says the business sector is “in a better financial position than it was several years ago” due to lower debts and improved liquidity.

Business profits fell by 1.5% in the December quarter 2011 but were up 3% for the year, according to national accounts.

But SMEs aren’t as strong, with survey measures of small business profitability still below average: “The national accounts measure of profits of unincorporated enterprises fell by 2% over the year to the December quarter 2011; the corresponding growth rate for (typically larger) incorporated businesses was around 5%.”

The number of unlisted businesses reporting losses was 20%, about the same as in 2011 and slightly above its pre-crisis average, but still down from a peak of 28% in 2009.

“The share of loss-making firms is higher among the smallest unlisted firms – as has been the case historically – and for firms in the agriculture, property services and utilities sectors.”

Real net worth per household is down 11.5% below its 2007 peak

Despite saving more, Australia’s net worth per household is estimated to have fallen by 6.5% over 2011, to be 11.5% below its 2007 peak.

The RBA says a 4% nationwide average drop in house prices is largely to blame for the drop in household wealth.

Sharemarket pain is banking gain, in part

Lessened risk appetite caused by the GFC has led to more money in the bank.

The RBA explains: “From the beginning of 2008 to September 2011, there were net outflows from households’ directly held equities of nearly $50 billion, while holdings of deposits increased by around $210 billion ($94 billion more than in the previous corresponding).”

“The share of (directly held) equities in household financial assets is now almost half its pre-crisis level, at 9%, while cash and deposits account for 27%, up from 19% in December 2007.”

But there’s still enough money to top up the mortgage

The RBA also notes many households chose to repay their mortgages quicker than required.

“Data from the latest HILDA Survey indicate that nearly 50% of owner-occupiers with mortgages were ahead of schedule on their repayments in 2010, a slightly higher share than in the 2007 survey,” it says.

“Given that most borrowers do not change their regular repayment amounts when interest rates fall, the reductions in lending rates in late 2011 would be expected to boost excess repayments even further.”

But they don’t feel richer, and employment will likely stay the same

“Despite the strength in incomes, households’ sentiment towards their financial position has been relatively weak in recent years,” the RBA says.

“For example, surveys suggest that households’ view of their current and future financial positions has dipped below average in the past year or so.

“Household sentiment may have been dampened by the softening in the labour market; employment and hours worked grew very little in the year to February 2012, and the unemployment rate is somewhat higher.

“Forward-looking indicators, such as surveys of business hiring intentions, point to only modest growth in employment in the period ahead.

Fears of mass mortgage default are overblown

“Although the household sector as a whole is still quite indebted, it remains the case that there is only a small share of very highly geared borrowers, and households generally appear well placed to meet their debt obligations,” the RBA says.

“Aggregate indicators of financial stress show that the household sector has been coping reasonably well with its debt level. While arrears rates on mortgages are still above average, they have eased a little recently, and remain low by international standards.

Business credit demand is weak

The RBA says business credit increased modestly in the six months up to January this year, after contracting over the past two years. It was still, however, 8% below its 2008 peak.

It says the outstanding value of loans smaller than $2 million each has been broadly stable since 2008, with demand weak for some time.

“Although liaison indicates that the availability of bank finance has improved over the past year for many firms, credit conditions remain tighter than prior to the crisis, particularly for loans to property developers.

“Business deposits at banks increased by 12% over 2011, after rising 8 per cent in 2010.”

Business and personal services sectors feature on collapse list

Some liquidators expect 2012 to be another record year, and the RBA tips the corporate insolvency rate may near its 2009 peak amid a patchwork economy.

The RBA says data showed insolvencies were concentrated in the business and personal services sectors, while hospitality and retail trade failures also increased a little.

CommSec adds that the significant divergence of conditions across sectors led to the higher than average non-performing loans and failure rates.