Foreign investors worried about Australian debt

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This was published 13 years ago

Foreign investors worried about Australian debt

By Chris Zappone

For all the noise about foreign investment in the housing market, one overlooked aspect is the international demand for Australian bank and mortgage debt needed to keep home loans flowing and prices rising.

Local economists and bankers say they are routinely asked about Australia’s household debt levels by overseas investors purchasing debt issued by local banks.

“It’s a constant question,” said Macquarie senior economist Brian Redican of his interactions with European and American investors. “There are just lingering concerns about household debt levels and whether house prices are going to hold up in Australia.”

Overseas investors held $645 billion in Australian wholesale debt and deposits in May, on Reserve Bank data, with local banks getting nearly 30 per cent of their funding from global markets.

Should global markets for housing debt become stressed – if, for example, there is another leg to the Europe’s sovereign debt crisis - or should Australia’s household debt be singled out by global investors, the ability of banks to lend could be squeezed.

Tighter access to credit could reduce loan sizes, which would weigh on housing prices.

Total outstanding mortgage debt in Australia was about $1.1 trillion in April, while other personal debt, including credit cards, stood about $141 billion, according to the RBA.

Perceptions overseas

Debt specialists have long warned that Australian banks’ dependence on global markets for funding could present a risk.

“Australia’s reliance on wholesale markets and offshore elements needs to be taken into account because you are more exposed to how other markets perceive the relative risks of Australia to other alternatives,” said Standard & Poor’s managing director rating services Fabienne Michaux.

“They’re not looking at Australia individually but in terms of their portfolio,” she said.

Hence, US-based investment fund GMO founder Jeremy Grantham, on a visit to Sydney in June, said interest rate rises will inevitably pop an Australian housing bubble.

Concerns about Australia’s debt profile also explain why the Reserve Bank has grown more vocal about the sustainability of Australian household debt position.

RBA deputy governor Ric Battellino said last month it was “reasonable to conclude that the household sector has the capacity to support the current level of debt.”

The ratio of interest paid to total household disposable income was 11.2 per cent in the March 2010 quarter, lower than the quarterly average ratio in 2008 of 13 per cent, RBA data show.

Macquarie’s Mr Redican said concerns from overseas investors about Australia’s debt levels are “unusual given that banks are in good shape and are highly rated compared to overseas financial institutions”.

Other economists, such as TD Securities’ Annette Beacher and Macquarie interest rate strategist Rory Robertson, report similar queries.

China links

UBS global asset management head of fixed income Anne Anderson said colleagues overseas had expressed concerns about a possible housing bubble in Australia but those worries were largely voiced by China-sceptics.

“The strength of our economy is correlated with the fortunes of China and emerging Asia but in the short term to draw that linkage to a housing price deterioration that feeds back into residential mortgage-backed securities I think is a long bow,” she said.

S&P and rival credit agencies Moody’s or Fitch maintain positive outlooks for Australian mortgage debt, as well.

Ultimately, risk associated with Australian mortgage debt is reflected in pricing.

ANZ Bank said this week it had paid 20 per cent more on its debt in the first half of the 2010 than the average.

“It comes down to pricing investors offshore would potentially look for more margin to account for more risk,” said S&P’s Ms Michaux.

czappone@fairfax.com.au

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