Research Note Index 2002-03

Research Note no.11 2002-03

Size of New and Existing Mortgages

Tony Kryger
Statistics Group
17 September 2002

With recent rises in interest rates, much attention has focused on the average loan size for owner-occupied housing and the effect that these increases have had on housing affordability. The Australian Bureau of Statistics (ABS) regularly publishes statistics on the average size of new mortgages, which has risen sharply from around $29 000 in 1982 to $157 000 in 2002. Until recently, however, little has been known about the average size of existing mortgages. While the ABS published a figure that put the average value of existing mortgages in 199899 at $77 400, that figure now appears too low to have been a reliable estimate. The Reserve Bank of Australia (RBA) has recently released a figure that puts the average value of existing mortgages in 2001 at $128 000.

The purpose of this Research Note is to examine what has been happening to mortgages in Australia and to look at the relationship between average mortgage size, monthly mortgage repayments and median family income, or in other words, the components of housing affordability.⁽¹⁾

Size of New Mortgages

The average new loan size for owner-occupied housing in June 2002 was $157 000. This figure, however, masks the considerable variability that exists between states with the average value of new loans ranging in size from $194 000 in NSW to $86 000 in Tasmania (Table 1). For first home buyers, who currently make up almost 20 per cent of all home buyers, the average loan size in June 2002 was $150 000.

During the past 20 years the average size of new housing loans has increased by more than 400 per cent. The average loan size has risen almost continuously during this time, the main exception being a four-month period from June 2000 when it fell by more than $10 000. This decline was in response to the introduction of the First Home Owners Scheme by the Federal Government on 1 July 2000 which resulted in a number of new home buyers entering the market. As new home buyers generally borrow less than other home buyers the effect was to reduce the average home loan size.

New Mortgage Size, Family Income and Monthly Repayments

The amount of a monthly mortgage repayment is a function of both the loan size and the interest rate. The financial burden of a mortgage repayment is a function of the level of family income. The Real Estate Institute of Australia has constructed an indicator of housing affordability that measures the relationship between median family income and average monthly home loan repayments on new loans. Effectively, the indicator measures the number of dollars of family income that are available to meet a given level of home loan repayment. For example, an indicator that had a value (say) of 41 in a given month would mean that an average of $4.10 of earned income was available to meet every $1 of home loan repayment due in that month. An increase in the indicator would therefore mean an improvement in affordability.

Figure 1 plots the movement in housing affordability during the past 20 years. It largely corresponds with the movement in interest rates over this period with affordability deteriorating sharply between June 1982 and December 1989 as interest rates climbed from 13.5 to 17.0 per cent. Affordability improved during the next four years as interest rates fell to a low of 8.75 per cent in December 1993. Interestingly, although the interest rate in December 1993 was very much lower than it was in June 1982, house price increases over this period ensured that the affordability indicator did not improve beyond what it was in the early 1980s. Housing affordability deteriorated suddenly again after 1993 as interest rates climbed to 10.5 per cent in June 1995. Although affordability improved after this date, it is significant that it remains very much below its peak level despite the fact that interest rates are at their lowest levels in over 20 years.

Clearly, while interest rate movements have an immediate impact on affordability, a longer term influence is exercised by the relativity that exists between the loan size and family income. Figure 2 shows that the increase in the average new loan size since 1982 has far exceeded the growth rate in median family incomes. In addition to making houses less affordable, this has made the affordability indicator much more responsive to interest rate increases.

Size of Existing Mortgages

From the results of its 199899 Household Expenditure Survey, the ABS noted that 'the principal outstanding on [existing owner-occupied] home loans averaged around $77 400 per household'.⁽²⁾ In August 2002, however, the RBA released its Statement on Monetary Policy in which it observed that between 1991 and 2001 'the average size of all outstanding owner-occupier loans [had] risen from $46 000 to $128 000'.⁽³⁾ Although it relates to a different year, the ABS figure is clearly too low to be consistent with the figures produced by the RBA. The RBA figures therefore imply far greater sensitivity by home buyers to interest rate increases.

The RBA method of calculating the average size of an existing mortgage is essentially to add together the value of all outstanding loans for houses and securitised residential mortgages,⁽⁴⁾ apply a factor that represents the proportion of these loans that were for owner-occupier (as opposed to investment) purposes and divide the total by the number of owner-occupied dwellings being purchased. The latter figure is derived from Census data while the other figures come from the RBA's own data collections. Using this method, the average size of existing mortgages in 1986 is estimated at somewhere between $20 000 and $25 000 while in 1996 it is estimated at $86 000.⁽⁵⁾

It is interesting to compare changes over time in the relative size of new and existing mortgages (Table 2). In June 1986, an existing mortgage was, on average, around 50 per cent the size of a new mortgage. That difference has progressively narrowed to the point where an existing mortgage is now almost 90 per cent as large as a new mortgage. This change reflects the dramatic increase in both the number of new borrowing commitments and the average size of new loans which has weighted existing mortgages more heavily towards those mortgages taken out in recent years. Also, the trend toward refinancing of existing home loans to purchase such things as cars and holidays has similarly acted to push up the average size of existing mortgages.

Conclusion

New and existing mortgages have increased significantly in size over the past 20 years, far in excess of the increase in family incomes. Apart from increasing the financial burden on households, larger mortgages mean that home buyers have become much more sensitive to interest rate increases than was previously the case.

Endnotes

1. See also Peter Hicks, 'Trends in Mortgages', Research Note no. 22, Department of the Parliamentary Library, 200001.

2. ABS, Australian Social Trends, 2002 (Cat. No. 4102.0), p. 181

3. Reserve Bank of Australia, Statement on Monetary Policy, 12 August 2002, p. 28

4. Mortgages that have been on-sold to financial markets, thus taking them off bank balance sheets.

5. The estimate for 1986 is expressed as a range due to the absence of a factor in this year for the proportion of outstanding loans that were for owner occupation. The estimate for 1996 was supplied by the Reserve Bank.

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