Household Debt

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Household debt high, rising faster than the unusually slow growth in incomes: RBA's Philip Lowe

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<p>GUEST OBSERVER</p>
<p>Australia’s household debt has been rising and is high by international standards.</p>
<p>The household debt-to-income ratio has risen from 167 percent in 2011 to 190 percent in Q4 2016. Assessing how much to worry about this is not straightforward.</p>
<p>On the one hand, high levels of debt make the economy more vulnerable to a negative economic shock. On the other hand, appropriately allocated debt is an engine of economic growth, as it better allocates resources between savers and investors.</p>
<p>Our long held view is that high household debt is not, in itself, a problem, as long as it is held by households that can continue to service it. The problem faced by many economies during the global financial crisis, such as the US and Spain, was that household debt was misallocated to households that could not service it. In Australia, the latest available statistics suggest that the distribution is fairly favourable.</p>
<p>As at 2014, most of the debt was held by high income earners and there were few low income households with large debt servicing burdens. In addition, Australia does not have sub-prime borrowers and all of the mortgages are full recourse.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.14.17%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.14.17%20AM.png" alt=""></p>
<p>However, household debt has risen since 2014 and there has been an investor-led house price boom in Sydney and Melbourne. As a result, it is hard to be certain about how much risk has built up recently. The longer it goes on, the more difficult it is to judge. It is for this reason that prudential settings have been tightened and that RBA Governor, Mr. Phil Lowe, has repeated that it would not be in the ‘public interest’ to cut interest rates further if it provided another boost to housing prices and debt.</p>
<p>In its recent financial stability review, the RBA deemed that, given lending standards have been tightening, the key risk from rising household debt is to the macroeconomic cycle rather than financial stability.</p>
<p>The central bank’s own granular assessment is that any build-up of risks that could see rising defaults in a downturn is not large enough to be a financial-system-wide risk. Rather, they suggest the key risk is that the higher household leverage could amplify the economic cycle. We expect that concerns about high and rising household debt will be a key factor that keeps the RBA from cutting its cash rate further. We expect prudential settings to remain tight. </p>
<p>Household debt is high, but mostly for fundamental reasons</p>
<p>Australia has high household debt and it has been climbing further in recent years. Indeed, across the range of economies regularly tracked by the Bank of International Settlements, Australia has the second highest level of household debt, relative to nominal GDP (Chart 1). In contrast, corporate debt is about average and public debt is low by international standards.</p>
<p>At the outset, a key question is: why is household debt high? In Australia, high household debt reflects that: firstly, the bulk of the housing stock, including the rental properties, is owned directly by the household sector using leverage, which is not the case across many nations; and, secondly, that housing prices are fairly high when compared with household incomes.</p>
<p>On the first point, this is because the owner-occupation rate is high, at around 68%, and because the bulk of the rental properties are also owned by the household sector directly. In Australia, investment properties, which are then rented, are a tax-favoured investment. So, unlike most other economies, including the US, for example, the stock of rental properties involves debt on the household balance sheet, rather than the corporate balance sheet. As a result, around one-quarter of Australia’s household debt is held by investors, which is a key reason that household debt levels are higher in Australia than elsewhere (Chart 2).</p>
<p>On the second point, Australia’s housing prices are fairly high relative to household incomes, although they are not exceptionally so (Chart 3). Australia’s housing-price to income ratio is around 5 times, which is a similar level to the UK, Ireland, Denmark, Spain, and the Netherlands. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.17.13%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.17.13%20AM.png" alt=""></p>
<p>For Australia, housing prices are high for a range of reasons, including relative economic success in the form of continued growth, low interest rates, strong population growth, and high foreign demand, in the face of limited supply.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.18.25%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.18.25%20AM.png" alt=""></p>
<p>Some of these factor are cyclical, such as low interest rates, while others are structural. A key structural factor is limited housing supply. The supply of well-located housing has been limited by planning regulations and poor urban infrastructure. As a result, Australia has very low rates of urban density despite being a largely empty continent (Chart 4). Although there has been a ramp up in residential construction in recent years, in the largest city, Sydney, there is still not enough being built to meet demand (see Downunder Digest: Apartment building boom is nearing its end, 10 January 2017).</p>
<p>It’s the distribution of debt that matters the most</p>
<p>If the overall high level of household debt is driven by fundamentals, then what’s the worry? Part of the concern is that debt has been climbing recently, and that the rise has been driven by investors, rather than owner-occupiers (Chart 5). Again, even this is not worrisome, as long as the new borrowers are expected to be able to continue to service the debt. Thus it is the distribution of debt that matters the most, a point we have made before (see Downunder Digest: Australia’s rising household debt: should we worry?, 22 April 2016). The challenge is that there is considerable uncertainty about the distribution of debt and that this uncertainty rises when growth in debt is driven by new borrowers.</p>
<p>In Australia’s case, the key cross-sectional survey from 2014 shows quite favourable trends. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.19.28%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.19.28%20AM.png" alt=""></p>
<p>The survey shows that the bulk of the household debt is held by high-income earners, with 74% of the debt held by the top 40% of income earners. The survey also shows that most of Australia’s highly-indebted households (those with debt-to-income ratios in the top 10th percentile of debt holders) are also high-income earners (Chart 6).</p>
<p>Australia’s financial regulatory environment is also strong. All mortgages are full recourse and there is no sub-prime lending. Australians also have an incentive to pay down their mortgages ahead of schedule, as they cannot deduct the expenses associated with their owner-occupied housing, such as mortgage interest, against their other taxable income. As a result, the average mortgage holder is around 21⁄2 years ahead on their mortgage payments (when offset accounts and redraw facilities are included). This means that the average borrower has a significant buffer on which to draw in the event of job loss or some other negative income shock.</p>
<p>So what is the concern? First, the information on the distribution of debt is from 2014 and we know that household debt has risen since then. We do not know much about the distribution of the new debt, although we do know that the bulk of it has been for property investors. On the positive side, historically, investors have been less likely to default on mortgages than first home buyers as investors tend to have equity in an owner-occupied property, and tend to be older and higher-income households with a loan repayment history. On the negative side, we do not know much about the new investors in recent years, although we know that the prudential regulator has been tightening its settings since late 2014 to prevent an excessive build-up of risk.</p>
<p>Second, although the average mortgage holder has a significant buffer, it is not the average borrower that typically defaults. At the riskier end of the spectrum of borrowers there is evidence of mortgage holders with only slim buffers against a negative income shock. For example, in a recent speech (4 May 2017), the RBA Governor, Mr. Phil Lowe, referred to data on securitised loans which showed that about one-third of borrowers only have a one-month buffer.</p>
<p>However, in that same speech Governor Lowe relayed that the RBA’s own assessment, with full access to all of the granular lending numbers, was that the risk of rising household debt levels was not to financial stability but to the macroeconomic cycle. Given that lending standards have been tightened and that risky loans are still only a small share of financial system liabilities, a large enough rise in loan defaults to shake the overall financial system is unlikely.</p>
<p>What happens when housing price growth slows?</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.20.23%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.20.23%20AM.png" alt=""></p>
<p>The RBA’s concern is that, when housing price and household credit growth slow down, this could exacerbate the economic cycle. Sydney and Melbourne have had significant housing prices booms in recent years, although it has been quite concentrated to these cities (Chart 8). </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.21.27%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.21.27%20AM.png" alt=""></p>
<p>Sydney and Melbourne housing prices have risen 77 percent and 58 percent over the past five years, while housing prices are only 14 percent higher in the rest of the nation.</p>
<p>The RBA’s argument is that the eventual slowdown, or fall, in housing prices and easing in the pace of household credit growth could weaken overall economic growth, particularly growth in household consumption.</p>
<p>While a slowdown in housing activity would, no doubt, have some effect, it may not be as large as in the past. Indeed, there is clear evidence that the recent ramp up in housing prices and household debt has had little impact on households’ willingness to borrow to consume goods and services. Unlike the early 2000s housing boom, households have not been withdrawing equity from their properties, but rather have been injecting it in recent years (Chart 9). If there has not been a significant positive wealth effect from rising housing prices and household debt, any slowdown in these factors may also have a more muted effect than in the past.</p>
<p>A key counter-argument is that the household saving rate has been falling in recent years, which provides some evidence of a positive wealth effect (Chart 10). That is, households may have been more willing to lower their saving out of income because their wealth has been rising.</p>
<p>However, the state-level numbers suggest that this story is a bit more nuanced. The biggest fall in the saving rate has occurred in Western Australia, following a sharp rise earlier. This reflects the impact of the mining boom, which boosted incomes significantly in that state prior to 2011/12 and where incomes have fallen since. Western Australian households saved when income growth was strong and have been saving less recently, in line with what a permanent income model might suggest.</p>
<p>However, the saving rate has not moved much in New South Wales and Victoria, where the housing markets have been booming recently. This suggests that the wealth effect has, in fact, been quite small in these states, consistent with the housing equity withdrawal numbers.</p>
<p>In our view, when the housing markets in Sydney and Melbourne cool, which we expect to be the case this year and next, we do not expect a large negative wealth effect.</p>
<p>For the RBA, the idea of the overall economic cycle being exacerbated by the housing cycle is clearly a concern. In our view this concern would suggest an earlier tightening, rather than a later one, though. If the concern is not allowing the housing boom to continue too long, because the end of the boom could cause problems, the risk-averse approach is likely to be higher rates, not lower ones. </p>
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<p><span><em><a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. </em></span></p>
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How worrisome is Australia’s high household debt? Paul Bloxham

Household debt, housing prices and resilience: Philip Lowe

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<p>GUEST OBSERVER </p>
<p>Expensive housing and high household debt leave Australian housing vulnerable. But without a recession or much higher interest rates a property crash is unlikely.</p>
<p>However, the surging supply of apartments and the continuing strength of the Sydney and Melbourne property markets pose an increasing risk. Average dwelling prices in these cities are likely to see another cyclical 5-10 percent price downswing around 2018, with unit prices in oversupplied areas likely to decline 15-20 percent.</p>
<p>The combination of high house prices, huge gains in Sydney and Melbourne, low rental yields and a coming surge in the supply of apartments mean property investors need to be careful. Best to focus on undersupplied, less loved parts of the property market. </p>
<p>Housing matters a lot in Australia. Having a house on a quarter acre block is part of the "Aussie dream". Housing is a popular investment destination. And the housing cycle is a key component of the economic cycle and closely connected to interest rate movements.</p>
<p>But in the last 15 years or so it has taken on a darker side as a surge in house prices that started in the late 1990s has led to poor affordability and gone hand in hand with surging household debt. Reflecting this, predictions of an imminent property crash bringing down the Australian economy have been repeated ad nauseam since 2003.</p>
<p>This note looks at the risks of a property crash, particularly given the rising supply of units, implications from the property cycle for economic growth and how investors should view it.</p>
<p>High house prices and high debt</p>
<p>The big picture view on Australian residential property is well known. First, Australian housing is expensive. According to the 2016 Demographia Housing Affordability Survey the median multiple of house prices in cities over 1 million people to household income is 6.4 times in Australia versus 3.7 in the US and 4.6 in the UK. In Sydney it’s 12.2 times and in Melbourne it’s 9.7 times.</p>
<p>The ratios of house price to incomes &amp; rents are at the high end of OECD countries and have been since 2003.</p>
<p>Second, the surge in home prices has gone hand in hand with a surge in household debt, which has taken Australia’s household debt to income ratio from the low end of OECD countries 25 years ago to now around the top. This can be seen in the next chart which shows the deviation in the house price to income ratio against its long term average for Australia against the ratio of household debt to income. The shift to overvaluation and high debt mostly occurred over the 1995-2005 period. </p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%209.09.15%20AM.png" target="_blank">Click to enlarge</a></p>
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<p> <span><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%209.09.15%20AM.png" alt=""></span></p>
<p>How did it come to this?</p>
<p>While it’s common to look for scapegoats to blame for high home prices and debt the basic driver looks to be a combination of the shift from high to low interest rates over the last 20-30 years which has boosted borrowing and buying power and the inadequacy of a supply response (thanks to tight development controls, restrictive land release and lagging infrastructure) to suppress the resultant rise in the ratio of prices to incomes.</p>
<p>The following chart shows a cumulative shortfall of over 100,000 dwellings relative to underlying demand had built up by 2014. </p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%209.11.08%20AM.png" target="_blank">Click to enlarge</a></p>
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<p>A home price crash remains unlikely</p>
<p>The surge in prices and debt has led many to conclude a crash is imminent. But we have heard that lots of times over the last 10-15 years. Several considerations suggest a crash is unlikely.</p>
<p>First, we have not seen a generalised oversupply and at the current rate we won’t go into oversupply until around 2017-18.</p>
<p>Second, despite talk of mortgage stress the reality is that debt interest payments relative to income are around 2004 levels.</p>
<p>Third, Australia has still not seen anything like the deterioration in lending standards seen in other countries prior to the GFC. In fact in recent years there has been a decline in low-doc loans and a reduction in loans with high loan to valuation ratios. </p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%209.12.51%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%209.12.51%20AM.png" alt=""></span></p>
<p>Finally, it is dangerous to generalise. While property prices have surged 60 percent and 40 percent over the last four years in Sydney and Melbourne, they have fallen in Perth to 2007 levels and have seen only moderate growth in the other capital cities.</p>
<p>But the risks on the unit supply front are a concern</p>
<p>To see a property crash - say a 20% plus average price fall - we probably need to see one or more of the following:</p>
<p>A recession – much higher unemployment could clearly cause debt servicing problems. This looks unlikely though.</p>
<p>A surge in interest rates – but rate hikes are unlikely until 2018 and the RBA knows households are more sensitive to higher rates so it’s very unlikely rates will reach past highs. </p>
<p>However, the risks on the supply front are clearly rising in relation to apartments where approvals to build more apartments are running at more than double normal levels. </p>
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<p><span>Due to the rising supply of units, vacancy rates are trending up </span><span>&amp; rents are stalling, making property investment less attractive.</span></p>
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<p><span>Outlook </span></p>
<p><span>Nationwide price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely before 2018 at which point we are likely to see a 5% or so pullback in property prices as was seen in the 2009 &amp; 2011 down cycles. Anything worse would likely require much higher interest rates or recession both of which are unlikely. However, it’s dangerous to generalise: </span></p>
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<p><span>Sydney and Melbourne having seen the biggest gains are more at risk and so could fall 5-10% around 2018. </span></p>
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<p><span>Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind but this should start to abate next year. </span></p>
<p><span></span><span>The other capitals are likely to see continued moderate growth and a less severe down cycle in or around 2018. </span></p>
<p><span></span><span>But units are at much greater risk given surging supply and this could see unit prices in parts of Sydney and Melbourne fall by 15-20% as investor interest fades as rents fall. </span></p>
<p><span>The property cycle and the economy </span></p>
<p><span>Slowing momentum in building approvals points to a slowdown in the dwelling construction cycle ahead. While this might be delayed into 2017 as the huge pipeline of work yet to be done is worked through, slowing dwelling investment combined with a slowing wealth affect from rising home prices mean that contribution to growth from the housing sector is likely to slow. However, as this is likely to coincide with a fading in the detraction from growth due to falling mining investment and c</span>ommodity prices it’s unlikely to drive a slowing in the economy. </p>
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<p><span>However, a likely decline in rents (as the supply of units hits) will constraint inflation helping keep interest rates low for longer. </span></p>
<p><span>Implications for investors </span></p>
<p><span>There are several implications for investors:<br></span></p>
<p><span>Firstly, over the very long term residential property adjusted </span>for costs has provided a similar return to Australian shares.</p>
<p><span>Its low correlation with shares, lower volatility but lower </span>liquidity makes it a good portfolio diversifier with shares. So there is clearly a role for property in investors’ portfolios. </p>
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<p><span>Secondly, there remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth. </span></p>
<p><span></span><span>Thirdly, these comments relate to housing in aggregate and right now it’s dangerous to generalise. Apartments in parts of Sydney &amp; Melbourne are probably least attractive but for those who want to look around there are pockets of value. </span></p>
<p><span></span><span>Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth its nearly 60%. Once allowance is made for exposure via Australian shares it’s even higher. </span></p>
<p><span><em><span><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a></span> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></span></p>
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The Australian housing market - Shane Oliver on the surging unit supply, the economy and what it all means for investors

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<div>The latest AMP.NATSEM Household Debt report showed that the average household debt in Australia has increased to a new high of $245,000, continuing a prolonged run-up which has seen the average debt per household increase by a factor four since 1988, up from $60,000.</div>
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<div>While the bulk of the rise in mortgage debt has been driven by 30 to 50 year olds, the over 65s cohort also accounts for a fair proportion of the increase in household debt, with more Australians than ever before taking liabilities into retirement.</div>
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<div>Despite this, the latest Australian National Accounts implied that interest serviceability has continued to become easier.</div>
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<div>There are a thousand possible ways to measure this, nine of which is satisfactory: the blue points on the chart below denote interest paid on dwellings as a percentage of total employee compensation minus income tax, while the red points show total interest paid inclusive of consumer debt (excluding unincorporated enterprises) as a percentage of gross household income.</div>
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<div>You could spend forever debating what should or should not be included in household income (imputed interest on dwellings, benefits receivable etc.) or backed out of gross household income (e.g. other taxes, transfers, insurance premiums etc.) but the results tend to be broadly similar. </div>
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<div>Of course the results generally appear to be "too low" due to the significant number of debt free households. The important thing to note is the trend, which shows that while the mining boom was in full swing the aggregate mortgage interest repayment burden was tending towards excruciating levels by September 2008 (when the official cash rate was still as high as 7 per cent). but since that time serviceability has become relatively speaking very easy.</div>
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<div><strong><span style="text-decoration: underline;">Buffers at record highs</span></strong></div>
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<div>The Reserve Bank of Australia (RBA) has noted in its Financial Stability Review that indicators of household financial stress are presently low, with households pushing ahead on repayments to the extent that aggregate mortgage buffers - as measured by balances in offset and redraw facilities - remain at around 16 per cent of outstanding loan balances, or the equivalent of well over two years of scheduled repayments at current interest rates. </div>
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<div>Loan arrears and mortage delinquencies data are also tracking at historically low levels, with favourable delinquency developments having cascaded lower since the 2008 book year. </div>
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<div>A crude comparison the aggregate interest paid to the total stock of outstanding housing credit implies that the average mortgage rate is well under 5 per cent, suggesting in turn that Australians have taken advantage of the very generous fixed rates available through 2015.</div>
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<strong><span style="text-decoration: underline;">The outlook</span></strong><br><br><div>The first chart above shows the sensitivity of household finances, and especially mortgage repayments, to the unpredictable changes in interest rates. Mortgage repayments are on average clearly very affordable now, but may not be so if interest rates rise sharply.</div>
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<div>The AMP.NATSEM report found that the highest typical debt repayment burdens are to be found in the outer suburbs of our capital cities.</div>
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<div>If interest rates were to rise by 2.5 percentage points - essentially the equivalent of ten interest rate hikes - then the most indebted households could see mortgage repayments rise from 42 per cent of household income to a stress-inducing 58 per cent, while perhaps unsurprisingly the most indebted low income households would be the hardest hit of all.</div>
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<div>An increase in interest rates of 2.5 percentage points would also see repayments for the typical first homebuyer rising from 21 per cent to 30 per cent of household income, or a shade over an extra $8,000 per year.</div>
<div> </div>
<div>There are few indications that the official cash rate is set to move materially higher any time soon, although shifts in capital requirements and funding costs may be another matter. </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Fragile markets</span></strong></div>
<div> </div>
<div>Unemployment rates have generally been trending down since January 2015, although unemployment rates in Western Australia and the Australian Capital Territory are in an uptrend, and the housing market in Darwin looks exceptionally fragile.</div>
<div> </div>
<div><a href="/images/2015/12/14/UERATE.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/12/14/UERATE.jpg" alt=""></div>
<div> </div>
<div>
<div>Although household financial stress is currently low, it seems likely that there will be some vulnerable housing markets in 2016, which may include;</div>
<div> </div>
<div>-resources regions and markets, with the terms of trade crunch likely to result in multiple mass lay-offs to add to the winding down of capital investment;</div>
<div> </div>
<div>-suburbs and sub-regions which are experiencing extensive over-building of apartments. particularly inner city high-rise stock, and those areas with already elevated and rising vacancy rates; </div>
<div> </div>
<div>-off-the-plan developments which will be adversely impacted by APRA's tougher deposit measures; and</div>
<div> </div>
<div>-outer suburban fringe locations in Sydney which saw a massive spike in investor activity and rapid price growth in 2015.</div>
<div> </div>
<div>I'd include a generic entry here for "mining towns", but many have been so utterly smashed already, leading to investor defaults and bankruptcies, since not only were prices unsustainable, so too were rents, and even tenancies. </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Auctions</span></strong></div>
<div> </div>
<div>Sydney's preliminary auction clearance rate rebounded a bit to 55.2 per cent this week, with outer suburban markets looking particularly dormant, The strongest auction market was a resurgent inner west, with a strong preliminary auction clearance rate of 74.6 per cent (<em>CoreLogic-RP Data</em>).</div>
<div> </div>
<div>This month's Labour Force data showed that New South Wales economy has generated a seasonally adjusted +176,000 jobs over the past year, for an outrageous employment growth rate of +4.9 per cent (trend +160,000 jobs, or +4.4 per cent). The Detailed Labour Force figures, which provide more colour by city, region and industry will be released on Thursday. So stay tuned for that and more this week. </div>
<div> </div>
<div>
<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
</div>
</div>
</div>
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Record household debt of $245,000: Pete Wargent

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<p>Each quarter the Reserve Bank (RBA) publishes household finances data which look at the ratio of household debts and assets to disposable income. The latest data shows households are becoming more indebted at the same time as the value of their assets are increasing.</p>
<p>According to the RBA, the ratio of household debt to disposable income was recorded at 193.7% at the end of June 2017.  The ratio sits at a record high having increased by 2.0% over the quarter and by 3.9% over the year.  Unsurprisingly, most of this debt is housing related; the ratio of housing debt to disposable income is recorded at 136.4% having increased by 1.4% over the quarter and 3.9% over the year.  </p>
<p>The first chart highlights how much household and housing debt has increased over time relative to disposable incomes.  It is also noticeable that since the financial crisis the rate of escalation has slowed.  Further data from the RBA reveals that of the 136.4% ratio of housing debt to disposable income, 103.2% is held by owner occupiers with the remaining 33.2% held by investors.</p>
<p><img src="https://www.corelogic.com.au/sites/default/files/styles/article_image_570w_/public/2017-10/2017-10-09-ppimage1.png" alt="2017-10-09--ratioofhouseholdandhousingdebttodisposableincome" width="570" height="272"></p>
<p>The second chart details the ratio of household and housing assets to disposable income.  At the end of June 2017 the ratio of household assets to disposable income was recorded at 935.6% and the ratio of housing assets to disposable income was 516.5%, both of which were record highs.  Over the past year household assets and housing assets have increased by 6.6% and 7.8% respectively, well in excess of the increase in household and housing debt. </p>
<p><img src="https://www.corelogic.com.au/sites/default/files/styles/article_image_570w_/public/2017-10/2017-10-09-ppimage2.png" alt="2017-10-09--ratioofhouseholdnadhousingassesttodisposableincome" width="570" height="281"></p>
<p>By comparing the ratios of assets and debt the RBA also produces ratios of household and housing debt to assets.  The data reiterates that although debt levels are high, at this stage that debt is well supported by assets which are valued substantially higher.  Over recent years the ratios of household and housing debt to assets has actually been falling.  In June 2017, the ratio of household debt to assets was recorded at 20.7% and the ratio of housing debt to assets sat at 26.4%.  </p>
<p><img src="https://www.corelogic.com.au/sites/default/files/styles/article_image_570w_/public/2017-10/2017-10-09-ppimage3.png" alt="2017-10-09--ratioofhouseholdandhousingdebttoassets" width="570" height="283"></p>
<p>A big contributor to the declining ratio of debt to assets over recent years has been the ongoing fall in interest rates to their current lows.  The RBA publishes ratios of interest payments to disposable income for household and housing debt.  The fourth chart highlights that households are paying significantly less interest currently than they were when interest rates were much higher.  At the end of June 2017 the ratio of household interest repayments to disposable income was 8.7% and for housing it was 7.1%.  Lower interest rates also mean that where there is a debt, debtors have the ability (if they choose) to maintain previous repayments which in turn means additional debt is repaid as interest rates fall.  </p>
<p><img src="https://www.corelogic.com.au/sites/default/files/styles/article_image_570w_/public/2017-10/2017-10-09-ppimage4.png" alt="2017-10-09--ratioofhouseholdandhousinginteretrepaymentstodisposableincome" width="570" height="281"></p>
<p>The data highlights that Australian households are heavily indebted, largely due to housing.  While debt levels are high, the value of household and housing assets are, at this stage, considerably greater than the level of debt.  Of course, if household and housing asset values begin to fall in the future, the accompanying debt may not fall at the same rate and that remains the main concern with the ongoing increase in household and housing debt.  Although Australia survived the financial crisis with much less damage than most other countries, it is noticeable how there was a fairly sharp rise in the ratio of household and housing debts to assets over that period.  A more sustained downturn could potentially see a much greater increase in these ratios as asset values fall but the debt against these assets remain.<br> </p>
<p><em>Cameron Kusher is head of research for CoreLogic. You can contact him <a href="https://blog.corelogic.com.au/about/"><span class="s2">here</span></a>.</em></p>
<p>To read the original article <a href="https://www.corelogic.com.au/news/household-debts-and-assets-hit-record-highs#.Wd6d5xOCyuV" target="_blank">click here</a>.</p>
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Household debt and assets reach record highs: Cameron Kusher

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<p>EXPERT OBSERVER</p>
<p>The ABS data showed that at the end of the March quarter, household net worth was $10.243 trillion.</p>
<p>While a large figure, household wealth has now fallen for two consecutive quarters and is -0.7% lower year-on-year. The $10.243 trillion in net worth is madeup of $12.701 trillion in assets and $2.458 trillion in liabilities. The recent fall in the value of assets at a time in which liabilities have continued to rise has led to the fall in net worth.</p>
<p>The Reserve Bank (RBA) analyses this data to produce a number of valuable ratios, including: debt, assets and interest payments to household disposable income.</p>
<p>These ratios highlight the impact of high levels of debt at a time in which asset values have fallen but the debt has not fallen at the same pace.</p>
<p>We’ve seen the ratio of household debt to disposable income continue to climb over the quarter, reaching a new historic high of 189.7%. The rise in household debt relative to incomes has certainly slowed; however, it continues to edge higher.</p>
<p>The ratio of housing debt to disposable income is recorded at 140.1% and was unchanged over the quarter. While it was unchanged over the quarter, it remains at an historic high level, highlighting that households remain very sensitive to the cost of mortgage debt.</p>
<p>Turning to the ratio of household assets to disposable income, it was recorded at 927.0% in March 2019. The ratio peaked at 961.7% in December 2017 and has trended lower since. The ratio of housing assets to disposable income peaked at 529.6% in December 2017 and as at March 2019; it was recorded at 483.5%.</p>
<p>The reduction in housing values has coincided with the period in which the ratio of household and housing assets has fallen which is no wonder when you consider housing accounts for around half of the value of household assets. </p>
<p>It's also important to consider is that while the value of assets are falling there has been no reduction in the ratios of debt to income which highlights that asset depreciation has been greater than debt reduction. As a result, the ratio of household debts to assets is at 20.5%, the highest it has been since December 2014 and the ratio of housing debt to assets is at 29.0%, the highest it has been since June 2013.</p>
<p>Despite the lowest interest rates since the 1960s, the ratio of interest payments to disposable income has trended higher years. As at March 2019 the ratio was recorded at 9.1% and although it has been steady for three quarters, interest payments relative to disposable income has trended higher on an annual basis</p>
<p>Furthermore, the ratio of interest payments to disposable income was last this high in September 2013. It is a similar story for the ratio of housing interest payments to disposable income, which is also trending higher, recorded at 7.6%, which is the highest ratio since June 2013.</p>
<p>With interest rates at generational lows there was perhaps, some expectation that households would use the low rates to pay off some debt however that has largely not occurred. With asset values recently falling the data shows that debt pay off has not been as rapid as the declines leading to a reduction in household wealth.</p>
<p>This data is to March 2019 and by the end of June 2019, there were some tentative signs that the declines in dwelling values were starting to level. While this means that there is likely to be a further decline in household wealth over the June quarter, it also suggests there is unlikely to be a meaningful reduction in household debt levels.</p>
<p>As such, household debt levels are likely to remain amongst the highest in the world. At the same time, the value of household assets remain substantially higher than the value of the debt. The cause for concern will be what happens if economic conditions deteriorate materially, leading to weaker labour market conditions and potentially creating some challenges around servicing such high levels of debt as unemployment rises.</p>
<p>Another medium to long-term consideration is a scenario where interest rates eventually start to rise. Households are generally able to service high levels of household debt while interest rates are at record lows, but eventually (probably not for at least several years) interest rates will rise.</p>
<p>If household debt levels remain high relative to incomes under a higher interest rate environment, the result could be weakness in household spending (as households dedicate more of their income towards servicing their debt) and potentially higher levels of financial stress amongst heavily leveraged households.</p>
<p><em>CAMERON KUSHER is the head of research for the Australian branch of CoreLogic</em></p>
<p><em>Kusher regularly posts on the <a href="https://www.corelogic.com.au/news" target="_blank">CoreLogic website</a>.</em></p>
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Australian Household wealth falling while debt remains: Cameron Kusher

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<div>EXPERT OBSERVATION</div>
<div> </div>
<div>There was a flurry of excitement back in January when previously reported 2017 figures implied that Australia's household debt pile had temporarily nudged against twice disposable income. </div>
<div> </div>
<div>However, the headline number was subsequently revised down.</div>
<div> </div>
<div>The latest ratios from the Reserve Bank of Australia (RBA) show household debt now sitting at at 1.9x disposable income.</div>
<div> </div>
<div>Or 190.13 per cent as at March 2018, to use a bit of false precision, up from 183.51 per cent a year earlier. </div>
<div> </div>
<div>Click here <a href="https://4.bp.blogspot.com/-Jg6DW-0Q4mU/WzqepI3WnUI/AAAAAAAAq2g/IgMCJx3uRN4KTafsk-RgZdhKL9lqNlKiACLcBGAs/s640/RBA1.jpg" target="_blank">to enlarge.</a>
</div>
<div> </div>
<div class="separator"><img src="https://4.bp.blogspot.com/-Jg6DW-0Q4mU/WzqepI3WnUI/AAAAAAAAq2g/IgMCJx3uRN4KTafsk-RgZdhKL9lqNlKiACLcBGAs/s640/RBA1.jpg" width="640" height="392" data-original-height="803" data-original-width="1310"></div>
<div> </div>
<div>There's a lot of debate about what this debt ratio should or shouldn't be.</div>
<div> </div>
<div>It will probably remain higher than was previously normal given the structure of Australia's population and immigration profile, with policy generally taking a keener regard of interest payments and serviceability. </div>
<div> </div>
<div>Although this is a revised series high, the rate of increase has slowed somewhat (while the gross figure also doesn't account for the record mortgage buffers and use of offset accounts racked up through this cycle).</div>
<div> </div>
<div>Moreover, given the precipitous drop in both the stock and flow of interest-only mortgages the ratio is likely to peak relatively soon as income growth also moves beyond the nadir. </div>
<div> </div>
<div>Anecdotally lenders are making it very difficult for brokers and borrowers to see loans written at the present time, which I believe will see the seasonally adjusted monthly value of investment loans pushed down to around $10 billion by the middle of the year, from nearly $15 billion at the 2015 peak.</div>
<div> </div>
<div>Money growth is now at its lowest level in 26 years, and investor credit growth is at a record low of just 2 per cent, even before accounting for headcount growth and inflation. </div>
<div> </div>
<div>
<span>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and </span><a href="https://petewargent.blogspot.com/" target="_blank">blogger</a><span>.</span>
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Household debt higher over 12 months to March

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<div>
<div>
<div>
<p>Household finance data released by the Reserve Bank (RBA) each quarter looks at the ratios of household debts and assets to disposable income. The latest RBA update shows that while households debt is growing, asset wealth is simultaneously increasing. </p>
<div title="Page 1">
<div>
<div>
<div>
<p>According to the RBA, the ratio of household debt to disposable income was recorded at 193.7% at the end of June 2017 and now sits at a record-high having increased by 2.0% over the quarter and by 3.9% over the year.</p>
<p>According to CoreLogic research analyst Cameron Kusher it was not surprising to see that most of this debt is housing related; the ratio of housing debt to disposable income is recorded at 136.4% having increased by 1.4% over the quarter and 3.9% over the year.</p>
<p>Kusher said, “Clearly, household and housing debt has increased over time relative to disposable incomes. Of note is that since the financial crisis, the rate of escalation has slowed.”</p>
<p>Further data from the RBA reveals that of the 136.4% ratio of housing debt to disposable income, 103.2% is held by owner occupiers with the remaining 33.2% held by investors.</p>
<p>At the end of June 2017 the ratio of household assets to disposable income was recorded at 935.6% and the ratio of housing assets to disposable income was 516.5%, both of which were record highs. Over the past year household assets and housing assets have increased by 6.6% and 7.8% respectively, well in excess of the increase in household and housing debt.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/05/Kusher1.png" target="_blank">Click to enlarge</a></p>
<p> <img src="https://www.urban.com.au/images/2017/10/05/Kusher1.png" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/05/Kusher2.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/10/05/Kusher2.png" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/05/Kusher3.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/10/05/Kusher3.png" alt=""></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/05/Kusher4.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/10/05/Kusher4.png" alt=""></p>
<p>By comparing the ratios of assets and debt the RBA also produces ratios of household and housing debt to assets. Mr Kusher said, “The data reiterates that although debt levels are high, at this stage debt is well supported by assets which are valued substantially higher.”</p>
<p>Over recent years the ratios of household and housing debt to assets has actually been falling. In June 2017, the ratio of household debt to assets was recorded at 20.7% and the ratio of housing debt to assets sat at 26.4%.</p>
<p>According to Kusher, a big contributor to the declining ratio of debt to assets over recent years has been the ongoing fall in interest rates to their current lows. At the end of June 2017 the ratio of household interest repayments to disposable income was 8.7% and for housing it was 7.1%. Lower interest rates also mean that where there is a debt, debtors have the ability (if they choose) to maintain previous repayments which in turn means additional debt is repaid as interest rates fall.</p>
<p>He said, “The latest household finance data from the RBA highlights that Australian households are heavily indebted, largely due to housing. While debt levels are high, the value of household and housing assets are, at this stage, considerably greater than the level of debt.”</p>
<p>“Of course, if household and housing asset values begin to fall in the future, the accompanying debt may not fall at the same rate and that remains the main concern with the ongoing increase in household and housing debt.</p>
<p>“Although Australia survived the financial crisis with much less damage than many other countries, of note was the fairly sharp rise in the ratio of household and housing debts to assets over that period. A more sustained downturn could potentially see a much greater increase in these ratios as asset values fall but the debt against these assets remain,” Mr Kusher said. </p>
</div>
</div>
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<p> </p>
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Household debt growing slower than asset wealth as both hit record highs

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<p class="post-title entry-title">EXPERT OBSERVER</p>
<p class="post-title entry-title">It's like<em> deja vu </em>all over again! </p>
<div id="post-body-5346701206206902946" class="post-body entry-content">
<div>The historic ratio of household debt to disposable income was once again revised down, but the trajectory remained up. </div>
<div> </div>
<div>And in the end, we ended up back in the same old place, with an Aussie household debt ratio still at 1.9x disposable income. </div>
<div> </div>
<div>Note that the impact of tax and rate cuts has yet to flow through fully to these figures, so behavioural patterns could change going forward. </div>
<br><div class="separator"><img src="https://1.bp.blogspot.com/-E1JICRVccs4/XY2p48YKbqI/AAAAAAAAx_E/iSC6SMuc62Yj4H-65nfDIT5IdyvUEI7mQCNcBGAsYHQ/s640/RBA1.jpg" width="640" height="378" data-original-height="808" data-original-width="1366"></div>
<div> </div>
<div>The 'record high' headlines will naturally follow in due course, although the ratio was ostensibly about 200 per cent a couple of years ago - before previous revisions were pushed through - and the growth in housing credit has since been crunched lower (to record lows for housing investors, at zero growth). </div>
<div> </div>
<div>The bulk of Australia's household debt remains concentrated in the upper two income quintiles, while net of a huge surge in prepayments the debt-to-income ratio is pretty much unchanged since 2006. </div>
<div> </div>
<div>Treasurer Frydenberg was also lightning quick off the mark to highlight that the value of assets was 5x that of the debt. </div>
<div> </div>
<div>Meanwhile the ratio of household interest payments to disposable income continued to fall and sow sits well under 9 per cent.</div>
<div> </div>
<div>This ratio is now some 33 per cent lower than at the 2008 peak, and trending lower (it was also higher in the late 1980s than it is today):</div>
<br><div class="separator"><img src="https://1.bp.blogspot.com/-p9EkMGT4dH4/XY2p49HieWI/AAAAAAAAx_A/AJhLZqxNtjAwS6pUx5zeVs07A6IQAmC-ACNcBGAsYHQ/s640/RBA2.jpg" width="640" height="370" data-original-height="813" data-original-width="1404"></div>
<div> </div>
<div>Interest rates have since fallen further in the September quarter, so further declines are in the post.</div>
<div> </div>
<div>There has been some mortgage stress, even in spite of the household interest payments ratio being down by a third, mainly experienced in Western Australia and largely related to the forced interest-only mortgage reset.<br><br><div class="separator"><img src="https://1.bp.blogspot.com/-kzDI0RPnsOI/XY245qcXHRI/AAAAAAAAx_k/poT5fkvt4uYJppj8l-6cjZan2M6BGJG3wCNcBGAsYHQ/s640/sandp.jpg" width="640" height="360" data-original-height="803" data-original-width="1422"></div>
<br>That said, S&amp;P expects arrears to fall as repayments have become easier. <br><div> </div>
<div><em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>. </em></div>
</div>
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