The Citi report argued that the growing number of multi-property investors and falling yields were a worrying sign for senior investors who may have little time left in their working life to repay their debts. The report was compiled using Citi figures and data from Digital Finance Analytics (DFA).
“Tighter application of responsible lending laws mean that investors must now have a clear debt repayment plan, although for many prevailing interest-only (IO) borrowers this does not exist,” said the Citi analysts lead by Craig Williams and Brendan Sproules.
“The large level of debt outstanding by borrowers aged in their 50s and 60s means many investors will need to sell property to discharge their debts.”
They warned that as 28 per cent of wealthy senior investors were not asked about a capital repayment plan upon loan application and 32 per cent of them do not have a capital repayment plan, “as these cohorts begin to hit retirement age, their investment properties will need to be sold to repay the debt”.
According to Citi, mortgage debt is “one of the most important economic and social issues of our time”, due to the risk that highly indebted households pose to the economy.
Citi and DFA’s figures reported that ~35 per cent of mortgages are held by investors, ~40 per cent of mortgages are interest-only and the percentage of investors holding IO loans has grown to ~70 per cent.
Considering this, Citi said most wealthy seniors (53 per cent) preferred the repayment structure because it helped them get a bigger loan. For most stressed seniors (72 per cent), IO loans appealed because of the ability to make smaller repayments.
Multi-property investors growing
Additionally, the proportion of wealth seniors who own multiple investment properties has grown in the years since 2011.
In 2011, 22 per cent of wealthy senior investors own two or three properties, 72 per cent owned one, and just 1 per cent owned six or seven.
Conversely, in 2017, 18 per cent of this group owned six or seven properties, 7 per cent owned two or three, and 73 per cent owned one investment property.
Across all cohorts, the percentage of multi-property investors has grown and this has been “coinciding with the considerable rise in IO mortgages”.
At the same time, however, the gross rental yield in Sydney has fallen from 4.3 per cent in May 2013 to 2.80 per cent in May 2017 and the average standard variable rate for IO loans at the major banks has grown from 6.17 per cent to 6.26 per cent.
Marking these cash flow and investment fundamentals as “deteriorated”, Citi said: “Looking forward, investors are losing the ability to ride out the cycle.
“The most important question for the future direction of house prices is – What will these multi-investment property borrowers do when faced with increasing cash flow losses and flat or declining property prices?”
Given that the average age of wealthy seniors is 63 and the average IO debt is $236,400, according to their figures, Citi expressed concern that this cohort will not have enough time to repay the principal “without a significant hit to household cash flows”.
Further, this group could be additionally affected by the needs of the adult children they might have. Citi pointed to research showing that the ‘Bank of Mum and Dad’ can now be considered Australia’s fifth largest home loan lender.
The RBA backs them up
The Citi analysts are not alone in their concerns. The Reserve Bank of Australia recently flagged the “potential risk” in the growing number of property investors over the age of 60 with mortgage debt. The “significant increase” in the share of geared investors was considered particularly alarming.
The RBA conceded, however: “While this seemingly could increase risks, there are some mitigating factors.
“Although this age group is more indebted, the average retirement age has increased over time, so older investors are more likely to be working, increasing their capacity to withstand shortfalls in rental income or higher interest rates.”