An interesting speech from Dr. Christopher Kent, Assistant Governor of the Reserve Bank of Australia (RBA) in Canberra. The speech noted that household consumption has responded to low interest rates since 2013, but in a less strong manner than might have been expected.
Let’s take a look at three of the main observations raised…
PART 1 – THE BALANCE SHEET AND WEALTH CHANNELS (“AKA. EQUITY WITHDRAWAL, MATE”) One of the drivers for a less strong consumption response through this cycle has been the diminished role of housing equity withdrawal. In the first half of the 2000s households withdrew significant equity to finance their consumption, but this no longer appears to be occurring on such a widespread basis, according to the Reserve Bank’s data. In fact in recent years household net spending on assets has exceeding borrowing. The evidence here suggests that the so-termed “wealth channel” – rising household wealth boosting consumption – has not been as effective to date as in cycles past. PART 2 – THE CASH-FLOW CHANNEL – HOUSEHOLD BALANCE SHEETS AND BUFFERS Of course, it is well known that Australian households are net borrowers on average. However, the RBA’s figures also show that while households’ interest earning assets (such as bank deposits) have risen strongly as a share of disposable income over recent years – even exclusive of superannuation – interest bearing liabilities have not. In fact, household liabilities as a share of household disposable incomes have been steady for some years now. How so? This is thanks in part to record low borrowing rates, with aggregate mortgage buffers apparently soaring to record levels and many households evidently electing to pay down their debt faster, known as “deleveraging”. I believe that this is in part due a mechanism whereby mortgage repayments are held steady even in the event of downward adjustments to interest rates on variable rate products, something which is perhaps unique to Australia. Average mortgage prepayments are rapidly approaching an incredible 30 months, while as a share of housing loans outstanding aggregate mortgage buffers have soared to well over 15 per cent, which is remarkable if true. In short, through this interest rate easing cycle more households appear to have moved further ahead on their mortgage repayments.
http://www.propertyobserver.com.au/finding/residential-investment/house-and-land/43447-june-16-rba-suggests-land-supply-constraints-could-spike-prices-pete-wargent.html