Throughout the pandemic I’ve been fairly optimistic about how robust Australia’s economy has remained – and that mindset continues. The data we see at ANZ and externally suggests the economy is very resilient.
“Whenever markets move quickly up or down, it's always a good time to look at what is causing that shift. And what we're seeing in Australia is house prices accelerating quite strongly.”
Of course, there are people doing it very tough in our community but thankfully it's a relatively small number either in small business or in terms of employment. On average, the economic resilience is quite remarkable in terms of the flexibility of businesses and the desire of employees and employers alike to get on with life.
The levels of savings in the community are also extraordinarily high – something that’s very important to ANZ given our focus on financial wellbeing. A combination of low interest rates and various government support packages have helped people through a rough patch and we think the Australian economy is poised - again, like it's done before - to bounce back when we get through this national plan and start opening up the economy.
As government assistance for businesses ends I think we will inevitably have some businesses struggling but hopefully - and I think the data would support this - it will be quite narrow and relatively constrained to certain areas.
The reason I say that is the savings balances of small businesses have been remarkably strong. Small businesses have done everything right throughout the pandemic and now they've tucked away some money so, even when government support starts to diminish, they've got their own savings to draw on to get them through.
At ANZ we monitor savings balances by industry. It may surprise some people to know the industries with the highest levels of savings balances (relative to the scale of the business) are actually accommodation, cafes and restaurants. Those in these sectors know they're in a vulnerable position and so they run their businesses quite conservatively.
Of course, it's not going to be easy and there will be some businesses which can't continue. But we're coming off a low base of insolvency rates. So it's inevitable this rate may inch a little bit higher but it's probably not going to be to extreme levels of insolvency like we saw in 1992.
The tricky thing will be that, after going through this level of uncertainty, businesses may not want to spend. According to recent data, 52 per cent of people have saved more money in the pandemic. The difference is this money is being putting away for savings rather than being spent in the economy or on a holiday.
This is simply a side effect of the pandemic. Over the last 20 months, we've learnt things can change and, despite best laid plans and commitments about dates, things do change. Moving forward, I think people will be more cautious and nervous about long-term investments for a period of time until they have the confidence we're finally in the post-COVID world and they can rely on the economy to stay open for a long period of time.
Hot market, hot topic
In Australia, the housing market has continued to be a hot topic – or, for some, an area of great concern.
The Federal Government is exploring whether to introduce new policies to tighten lending from the banks and it’s something we are keeping a very close eye on. To put it simply – the banks can always make it a little bit harder for people to access these loans by putting in what the market calls “macroprudential rules”.
This isn’t a new thing for the market. The Australian Prudential Regulatory Authority (APRA) has put in “speed limits” on the way banks lend in the past. For example, if you applied for a home loan today, the interest rate on that loan might sit at around 2.25 per cent. As part of that application process, the banks assess your personal situation while assuming an interest rate of more than 5 per cent – we essentially build in a buffer. If APRA wanted to “slow down” lending, they could suggest a new buffer of say 5.5 or 6 per cent. In this way, we put our thumb on the scale to alter the way we assess a loan application.
Of course, that makes it a little bit harder for people to borrow as much as they might have previously which, in turn, is meant to reduce demand in the market and make it cooler.
Personally, I think this is a reasonably good idea. Whenever markets move quickly up or down it's always a good time to look at what is causing that shift. And what we're seeing in Australia is house prices accelerating quite strongly. ANZ Research is forecasting growth of around 20 per cent in 2021 and potentially even more next year.
Another figure we are keeping an eye on is that more than 20 per cent of new loan applications are borrowing six times their income or more. That's obviously a big number and one we need to be on top of but it’s not necessarily a dangerous figure.
If you look at what percentage of household incomes are used to pay interest rates on a home loans, it's at a 20-year low. And if you look at how much of a household income is used to pay interest on all debt, that's at a 35-year low. So people do have the capacity to keep on top of their repayments if interest rates move higher. And given banks assess applications with that interest rate buffer I mentioned earlier, it's not necessarily a problem but rather something we continue to think about.
There is also a lot of talk at the moment about first home buyers being shut out of the market given the sharp increase in prices. To me, it doesn't feel like that. I certainly don’t want to dismiss the community concern on this topic as I think it is valid but entry into the housing market has been a concern for more than 20 years.
First home buyers account for between 10 or 11 per cent of new loans today. This figure peaked last year at around 17 per cent because of various government grants, subsidies and promotions but has stabilised now.
But even if we aren’t seeing increased evidence of first home buyers being shut out of the market, this doesn’t mean it isn’t hard. It may simply mean first home buyers are being pushed into different parts of the market – further out of town, into apartments instead of houses, cheaper price brackets and so on.
Shayne Elliott is CEO of ANZ
This article has been adapted from an interview with Shayne Elliott originally aired on 3AW with Neil Mitchell. You can read the full transcript here.