Ross Greenwood speaks to Phil White, QBE’s Lenders Mortgage insurance CEO, about a report showing that house prices are likely to increase over the next three years but a glut of apartments will see unit prices fall
Introduction: What will happen to property over the next three years?
Ross Greenwood: Welcome back to Money News right around Australia. I just want to play something from the senate estimates day. This is probably one of the most powerful economic influences in Australia, it’s John Fraser, the Treasury secretary. Now he asked, and he gave some indication about this in his opening address, about household debt and the impact. The reason why that’s important is because today a new study came out from one of the most important influencers in regard the house process and that’s the mortgage insurance sector. QBE’s mortgage insurance area is absolutely important to understand the risks inside our housing market. In the meantime, let’s go to John Fraser, the Treasury secretary.
John Fraser: The Australian household sector’s assets holdings are considerable at around five times greater than its debts. Australian households may have over two trillion dollars in debt but they also have 12 trillion dollars in assets. That said, asset values can always fall and often do. Well, that varies generally in time, squeezing net worth in the process.
Ross Greenwood: Let’s now go from there because that’s pretty damning because what he says there remember, that your asset prices can come down suddenly but your debts tend not to especially when my dues are as low as they are as will be in time. Then let’s go the area which is most affected by if something goes wrong in the housing market, that is if your deposit is not big enough, your lender will make you go out and get mortgage insurance. The mortgage insurance does not cover you, it covers the lender, and so therefore if you stop paying ultimately your lender, your bank, can climb on the mortgage insurance.
Phil White, is the Chief Executive of QBE Lenders Mortgage Insurance, is on the line right now. Many thanks for your time, Phil.
Interview with: Phil White, QBE Lenders Mortgage Insurance, CEO
Phil White: Good afternoon Ross. How are you?
Ross Greenwood: Good. Thank you. Okay, your view of the housing market is pretty important here. In those capital cities that have actually boomed over the last three or four years, Melbourne, Sydney, Canberra, to a lesser extent, Brisbane, are they at– well, is there any fear of collapse in those markets as we can see them starting to come off?
Phil White: The report that we produce today as we forecast house prices across all capital cities are going to increase over the next three years with the exception of Sydney and Darwin. For Sydney, we expect house prices to come off for the next couple of years but then pick back up in about 2020 to finish at the almost same position as they are today. In contrast to that, we see units falling in most capital cities, certainly in the four largest capital cities and units are expected to climb, and they’re now making up about half of all the dwelling construction across Australia.
Ross Greenwood: Right. Now the reason I say Phil that you’re pretty important in all of this is, being a mortgage insurer, you basically have to pick up the slack if people go broke and don’t actually pay off their mortgage. Why is it that you are so confident that these house prices will not collapse as some forecast as to put it out there, and why is it that you believe that people will be able to keep paying their mortgages?
Phil White: Let’s deal with different questions there. Let’s deal with the house price question first. House price is largely driven by supply and demand, and we’re still seeing Australian population grow at very strong levels, and we may see some and volatility in prices such as in the Sydney market, such as in the unit market, but if I actually take a longer term view and look at perhaps the next 15 years, Australian population is forecast to increase by about six and a half million people. That’s 25% increase in population.
All those people need somewhere to live and so if we’re going to actually meet that demand, we’re going to have to keep construction levels at about the levels that they are in the foreseeable future.
Ross Greenwood: Okay. The next part about this is what would be the risk factor that you would really be looking at most closely because you’ll be looking at your own book and the exposure that you have got.
Phil White: That’s right. We look at, first and foremost, the employment. While people have got a job, especially in Australia, people tend to pay their mortgage. The second piece we’ll look at is income. We recognize that if people’s incomes go down through reduced hours or reduced wages, or interest rates go up and therefore they are going to increase, and that could also put stress on households.
In the last few years we’ve all been testing people when they apply for their mortgage at a significantly high mortgage rate than they are paying. The QBE LMI which has a minimum of seven 7.5% and the mortgage right now, especially if you’re an owner with a principal interest mortgage, you shouldn’t be paying more than 4%. That should be the buffer for interest rate increases coming up. We do recognize some people’s circumstances have changed over the time, and if interest rates do go up or perhaps I should say when they go up, we will see some stress come into the market.
Ross Greenwood: I’ll tell you what Phil, I’ve got to keep on going, but it’s a really interesting report but for the time being it always you see unemployment rise or wages come off, people apparently seem to be relatively safe. There’s no crash coming according to the mortgage ensurers and they are the ones, almost a canary in the coal mine if you like. Phil White is the Chief Executive of QBE Lenders Mortgage Insurance. Phil, many thanks for your time in the program tonight.
Phil White: Thank you, Ross.
Interviewed Michaelia Cash, Employment Minister titled ” Unemployment at a four-year low but what about wages? .”
Interviewed Senator Cory Bernardi, Leader of the Australian Conservatives titled ” Dual-Citizenship: “Stop the circus” .”