The Australian Bureau of Statistics released an important summary today on Australian Households debt. “Household debt has increased nearly twice as fast as the value of household assets over the last 25 years”, though growth is slowing now. The data and analysis is presented in a report “Trends in Households Debt“. There are some worrying findings which the RBA would do well to take note of. The ABS data averages across all households, our own analysis at a segment level highlights the fact that for some households, the situation is more extreme.
They make the following observations:
Total household debt stood at $1.84 trillion at the end of 2013, equivalent to $79,000 for every person living in Australia at that time. This was higher than it had been at any time in the previous 25 years, even after making adjustments to remove the effect of general price inflation (thereby giving a ‘real’ comparison).
The rate of increase in real household debt per person has slowed since the onset of the Global Financial Crisis (GFC) in August 2007. After increasing at an average of 10% per year between mid 2001 and mid 2007, real household debt per person rose at the much slower average annual rate of 2% between mid 2007 and the end of 2013. This slowdown may, in part, reflect the tightening in mortgage lending standards after 2008.
REAL HOUSEHOLD DEBT PER PERSON
Rising household debt has been only partly matched by the increase in the value of household assets. Over the past 25 years, household debt has increased nearly twice as fast as the value of household assets. Expressed as a percentage of the value of household assets, household debt increased from just under 11% at the end of September 1988 to nearly 21% at the end of 2011, before easing a little to below 20% at the end of 2013.
SIZE OF HOUSEHOLD DEBT COMPARED WITH ASSETS
Income is an important consideration when deciding on a household’s capacity to make loan repayments in full and on time. Household debt increased more rapidly than household income from early in 1993 until the middle of 2007. Since mid 2007 (and the GFC), household debt has tended to rise in line with household income. At the end of 2013, the amount that households owed was nearly 1.8 times the amount of disposable income households received during 2013.
SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME
The size of Australia’s household debt compared with its income (household debt to income ratio) is not just high in historical terms, it is also high when compared with the household debt to income ratios of the G7 countries (i.e. Canada, France, Germany, Italy, Japan, UK and USA). For example, in 2012, Australia’s household debt level was equivalent to 1.73 times Australia’s 2012 gross disposable household income, whereas household debt in both Italy and Germany was less than a year’s worth of gross disposable household income (at 82% and 93% respectively).
SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME
Loan repayments usually contain an interest component and an amount that reduces the loan principal. All other factors being equal, the higher the interest component the lesser the opportunity to reduce the loan principal and pay off the debt quickly. When interest payments represent a high proportion of disposable income it may be difficult to reduce debt at all.
For the December quarter 2013, the total amount of interest households paid on money they had borrowed was equal to 7% of the gross disposable income they received during the same quarter (household interest to income ratio). While this is currently higher than it has been during most of the past 50 years, it is clearly lower than what it had been at its highest point in 2008 (12%).
SIZE OF HOUSEHOLD INTEREST COMPARED WITH INCOME
The share of banks’ domestic housing loan portfolios that were either impaired, or at least 90 days overdue but well secured, edged lower over the six months to December 2013, to 0.6%. This percentage has declined from its 21st century peak of 0.9% in mid 2011, aided by low interest rates and generally tighter mortgage lending standards in the period since 2008. The percentage of impaired housing loans has fallen slightly over recent quarters; the rise in housing prices appears to have helped banks deal with their troubled housing assets, with a number of banks reporting a reduction in mortgages-in-possession. The total number of court applications for property possession declined in 2013 in NSW, Vic., Qld and WA.
The total number of non-business related personal bankruptcies, debt agreements and insolvency agreements was also lower across most of Australia in 2013. Non-performance rates on banks’ credit card and other personal lending, which are inherently riskier and less likely to be secured than housing loans, declined slightly over the second half of 2013 to around 2%, following an upward trend over the previous five years.
Products such as home equity loans, redraw facilities and offset accounts are more popular now than in the 1990s. These types of loan products make it easier for households to build mortgage buffers, enhancing their ability to cope with income shocks.
Many households have used lower interest rates to continue paying down their mortgages more quickly than required. As a result, the aggregate mortgage buffer (i.e. balances in mortgage offset and redraw facilities) has risen to almost 15% of outstanding balances, which is equivalent to around 24 months of total scheduled repayments at current interest rates. This suggests that many households have considerable scope to continue to meet their debt obligations, even in the event of a spell of reduced income or unemployment.