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Australian property prices are cooling and household debt is high, but that's no problem: HSBC

Aussies have some of the world's highest debt levels, and property prices are finally cooling. But investors fearing a U.S-style credit crisis needn't worry, according to a new report from HSBC.

As Canberra reoriented economic growth away from mining and towards services, a housing construction boom began, leading to a 30 percent increase in home prices since mid-2012 and making Australia one of the world's least affordable property markets. As a result, the household debt-to-income ratio jumped from 167 percent in 2011 to 186 percent in 2015, HSBC said.

"This makes Australian household debt levels amongst the highest in the developed world."

The rise in home prices slightly softened the household debt-to-asset ratio, which fell from 24 percent in 2011 to 22 percent in 2015. But as the market beings to cool, that raises questions about the sustainability of household debt, the bank said.

National housing prices have been steady over the past six months, with the slowdown most reflected in major cities. In Sydney and Melbourne, prices have been flat since October, following annual average growth of 10 and 6 percent respectively, over the previous four years, HSBC noted.

Sydney, Australia. For the last three months of 2015, prices in the city fell 1.6 percent for the quarter, the first decline since 2012, according to government statistics.
Brendon Thorne | Bloomberg | Getty Images
Sydney, Australia. For the last three months of 2015, prices in the city fell 1.6 percent for the quarter, the first decline since 2012, according to government statistics.

The bank forecasts national housing price growth to run at low single-digit rates this year and into 2017, following growth of about 10 percent in 2015, on the back of over-supply. That could increase the household debt-to-asset ratio, leaving residents vulnerable to external shocks.

But Australia's case is manageable because it has good distribution of debt, unlike the U.S. pre-global financial crisis, HSBC explained.

"It is unusual for the high debt levels, in themselves, to be the driver of a downturn... Importantly though, even in the U.S., it was not the level of aggregate debt that mattered most, but the distribution of debt."

The bulk of Australian debt is held by higher income households, with 2010 data revealing 72 percent of household debt was held by the top 40 percent of income earners, HSBC said. The lowest 20 percent of earners held less than 4 percent of the debt, it added.

Moreover, Australia's financial system has institutional features that help to reduce any risk of a crisis.

"For a start, all mortgages are full recourse. Australia's tax system also favors paying down mortgages ahead of schedule as interest payments and expenses on owner-occupied properties are not tax-deductible," HSBC said.

Full recourse means that lenders can pursue a debtor's other assets to cover a loss on a loan, rather than having to write off losses on underwater loans, as occurred in many U.S. states during the credit crisis.

"The average mortgage is currently over 2.5 years pre-paid, leaving households with a significant buffer in the face of the risk of rising unemployment," it added.

Strict lending rules have also been helpful in creating stable loan portfolios.

Banks are now required to slow the growth of lending to property investors to below 10 percent on-year, test new borrowers for a higher mortgage rate than offered and hold more capital.

"These tighter prudential settings have seen a clear pullback in lending to investors," HSBC observed, indicating these new rules could curtail future debt levels.

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