Australia’s big banks are some of the most profitable in the world, while Australians are some of the most indebted. Harry Chemay examines the connection.
Australians are not only borrowing more and more, we are increasingly turning our houses into virtual ATMs, extracting equity in support of lifestyles no longer attainable from rising real incomes alone. That’s the ‘wealth effect’ that the Reserve Bank itself acknowledges as material to consumer spending these days.
In the first part of this series, we looked at how Australia’s housing market, now valued at more than $11 trillion, is powered by a mountain of mortgage debt, much of it written by the Big 4 banks: ANZ, CBA, NAB, and Westpac.
We uncovered how the average mortgage balance outstanding now exceeds $400,000, while older mortgaged Australians, those between 55 and 64, still owe their banks more than $230,000 on average.
Why are older homeowners making so little headway in being mortgage-free before retirement?
And what does it mean to approach your retirement years with significant housing debt still owing? That’s the focus of the second piece in this Mortgage Nation series.
Mortgage nation. Australian retirees owe record amounts to the Big Four banks.
Upgrades, breakups and the virtual ATM
The age of first homeownership has been steadily rising over the years. In 2016 the median age of the first homebuyer was 35. It is now nudging 37.
On average, Australians own units for between 7 and 9 years, and freestanding dwellings for broadly between 9 and 11 years. That means that few people retire having owned only one property. Many will have sold and bought at least twice more, generally upgrading in some combination of location, size and price as they go.
Thus, a 37-year-old owner occupier who enters the property market today may need to refinance again aged between 44 and 48, and then possibly again in their mid to late 50s.
All this transactional activity currently totals around $18B each month just for owner-occupied dwellings, around 75% of which is written with the Big 4 banks, often via mortgage brokers. Then there’s the housing finance sought by those who have experienced relationship breakdowns.
Data collated by the Australian Institute of Family Studies shows that the age of divorce has been steadily rising since the 1980s, with the median age of divorce for males being 45.9 and 43 for females in 2021. Many of these individuals finance the purchase of a new property (or refinance an existing one) as they reestablish themselves.
And finally, there are those who look to their homes to help supplement their lifestyles, via home equity redraw facilities. A recent study into equity redraw behaviour found that one in five homeowners in Australia had released equity by increasing their mortgage debt in the decade leading up to the Global Financial Crisis of 2007-09.
The researchers found that the most recent median redraws by borrowers accessing such facilities aged 35 to 44 was $70,000, while for 45 to 54-year-olds, it was $100,000.
This dovetails with prior evidence that between 2000 and 2009,
one in five homeowners aged 45 to 64 years increased their mortgage debt even though they did not move house.
All of which result in two consequential outcomes.
Global debt-to-income ratios.
First, Australians are now among the most indebted people anywhere. The Reserve Bank acknowledges that the ratio of debt-to-income for Australian households is among the highest in the developed world, as this chart from a 2020 RBA research paper indicates.
The most recent figure has the Australian household DTI ratio at some 214%.
That, as mortgaged homeowners have recently experienced, creates a lot of pain when interest rates suddenly rise. The larger the loan taken, the greater the pain.
Second, it’s taking longer to be mortgage-free.
In 1981, the typical age at which home-owning Australians would pay off their mortgage was 52. According to Treasury, by 2016 one in every two Australians aged 62 still had a mortgage balance outstanding. Adding $100,000 to your mortgage in your mid-40s to 50s certainly wouldn’t help matters here.
Where are the Big 4 Banks?
Having been excoriated during the 2018-2019 Hayne Royal Commission, losing all but one CEO, the Big 4 banks have bounced back surprisingly well, doubling down on ‘traditional retail banking’ (i.e. mortgage lending) while near-completely exiting superannuation, wealth management and financial advice.
Hayne’s Final: impressive tinkering but big banking flaws remain (Part 2)
The recently released Major Australian Banks year-end roundup by consulting firm KPMG shows the Big 4 generating a combined net profit after tax of almost $30 billion, generated from operating income of some $90 billion.
To put that into perspective, the only ASX-listed company that can break the stranglehold of the Big 4 banks for profitability is BHP Group Limited, a dual-listed entity with significant mining and mineral interests around the globe.
By contrast, having reduced their global footprint over the past decade, the Big 4 banks generate most of their revenues within Australia.
With an average return on equity just shy of 11%, they are some of the most profitable banks anywhere in the world’s advanced economies.
A large part of that success is due to the humble residential property mortgage.
What does it mean?
Australia is full of incentives that encourage the building of wealth through residential property, and a financial system primed to facilitate that very outcome.
As house prices are now both comically and economically detached from wages, the only way to continue playing this game (lest you get left behind as a forever renter) is with ever-escalating debt, hoping that your home equity will outgrow the interest you’ll pay on it.
We’ve loaded ourselves up to the eyeballs with mortgage debt to chase financial security and the Australian dream.
Which would be fine, if our real (after-inflation) incomes could even remotely keep up with rising property prices. Instead, income growth has broadly flatlined since the mid-2000s, as the below chart by Bill Mitchell, Professor in Economics at the University of Newcastle, shows. After inflation, growth in private sector wages has been anaemic at best.
Conventional economic theory suggests that large housing debt taken early becomes a minor problem as you age, because your growing real income makes the debt a smaller percentage of your overall living expenses as time passes. In essence, you simply ‘deflate’ the housing debt problem away.
Except that’s not what has eventuated for many who’ve entered the housing market in the last 20 or so years, as the below chart from the Committee for Economic Development of Australia (CEDA) indicates.
Changing circumstances, property upgrades and relationship breakdowns force people back into the housing market at ever higher prices, financed with ever greater mortgage debt. And even when we’re not moving, we spend our ever-increasing mortgages – the wealth effect.
The flip side of this profligacy is that we’ll most likely carry significant mortgage debt into our sixties, and then be faced with hard decisions as retirement approaches. Continue working well beyond 65 to pay off the mortgage from our wages, or dip into our superannuation to be done with the debt noose.
Either way, our Big 4 banks are in a no-lose position.
In the final instalment of Mortgage Nation, we’ll look at how the Big 4 banks have built such an unassailable position in residential property lending, how such lending is financed, how loan books are regulated and whether the rise of mortgage brokers has had any impact on the dominance of the four major banks.
Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.