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BFCSA: Mortgages understated by 40pc says Deutsche. Major FLAW in APRA data

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Mortgages understated by 40pc: Deutsche

Australian Financial Review Mar 22, 2019 3.52pm

Jonathan Shapiro


Analysts at Deutsche Bank have identified a major flaw in the prudential regulator’s mortgage data, which they believe severely understates the average balance size of an Australian mortgage because it fails to adjust for "split loans".

This, they argue, may have resulted in the $276,000 figure for the average mortgage balance being understated by up to 40 per cent, potentially giving regulators, economists and the broader analyst community a false sense of comfort about the indebtedness of Australian households.

In a note sent to clients this week, Matthew Wilson and Anthony Hoo said the number of residential loans to households reported by the Australian Prudential Regulation Authority “makes no sense”.

“APRA appears to have a data problem – the number of mortgages is up 75 per cent since March 2008; yet population is up only 18 per cent over the same period,” the analysts said.

“We suspect the data cannot cope with loan splitting and hence the average balance data presented is of little use.”

The analysts are suggesting that because many customers that have split the same mortgage into multiple formats, the average balance reported in the aggregate numbers understates the true average home loan size per household.

For instance if a customer has split a $1 million mortgage 50:50 into fixed rate and variable rate loans it implies an average loan balance of $500,000, not $1 million.

The analysts' estimate that the average reported mortgage balance of $276,000 is underestimated by 40 per cent, is based on an assumption that 50 per cent of all mortgages are not split, while the remaining balances are split three ways.

Questionable statistics

The Reserve Bank, which also maintains a mortgage data set based on securitisations, has also determined the average mortgage balance to be about $300,000, which may also be understated if split loans are not accounted for.

Further evidence that the official statistics may be incorrect is buried in a footnote of ANZ Banking Group’s full-year results presentation. On a page entitled Australia Home Loans – portfolio overview, ANZ discloses that in calculating new accounts, the figure includes “increases to existing accounts and split loans (fixed and variable components of the same loan)”.

The APRA data is also significantly different to figures presented by ASX-listed mortgage aggregator AFG, which reports its average home loans balance to be $509,736, based on over 27,000 mortgages lodged in the first quarter of 2019.

Several sources have confirmed that the APRA data did not account for split mortgages and therefore may be understating the average mortgage balance.

But the data may also overstate the average because it fails to account for offset accounts in which households may hold excess cash against their mortgage to reduce their interest payments. These loans account for about 8 to 10 per cent of balances of the banks' total mortgage books.

The Reserve Bank has previously presented household indebtedness charts that adjust for "offset" accounts but these appear to have a marginal impact on overall debt-to-income ratios, and repayment-to-income ratios.

While the average mortgage balance figure may imply households are carrying less debt than they actually are, the prudential regulator relies on other metrics on serviceability and loan-to-valuation ratios to understand borrower indebtedness.

The Deutsche Bank report is not the first time the accuracy of mortgage data – which has become critical for regulators that are trying to assess the financial stability impacts of the housing market and the potential impact on household wealth and consumption – has been called into question.

When APRA imposed restrictions on investor loans, which led to differential home loan pricing, $50 billion of mortgages were subsequently reclassified as "owner-occupied loans" as customers sought to borrow at the lower rate.


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