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Household Debt Highest In Past 25 Years – ABS

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

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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

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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

2The 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

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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

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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.

Household Incomes and House Prices

The ratio between income and house prices in an important indicator, because if it gets too far out of whack, its a sign of stress in the system. Data is often cited to show that on average, the ratio of debt to disposable income verses house prices track quite closely and so we are not in a house price bubble. So when Christopher Joye wrote in the SMH yesterday about the risk to house prices, and published data to show the average ratio between prices and disposable income was a high 4.4, we were prompted to revisit this issue.

It is relevant because the RBA is talking about a ratio of 5.0 times using the national accounts data which includes a number of items like compulsory superannuation, workcover premiums, and owner-occupied imputed rents, none of which are really discretionary. An article in the AFR at the time, suggested a ratio of 7.0 was nearer the mark.

We already highlighted the risk of taking an average value across all households, and used the NSW data to show relative movements across time by segment. But we have just run some numbers by segments, across states, from our surveys (latest date is 1 week old) and here are the results. No surprise the ratios vary by type of property owner, and also by state. First time buyers are at  7 times in NSW, whereas people refinancing in Tasmania are at 3.5 times.

RatioIn addition, looking at data from the ABS Social Trends Database we see relative household income analysis. We show both the gross household income and disposable income, annualised in the chart below.

IncomeFinally, we referred back to the recent Demographia survey. Their method is based on rating affordability using the “Median Multiple” of house prices and income, which is widely used to evaluate urban markets, and which has been recommended by the World Bank and the United Nations. They do not consider mortgage costs, because interest rates vary, whereas the price for a property is more stable. Severely unaffordable geographies included Australia (6.3), New Zealand (8.0), and Hong Kong (14.9). Sydney (9.0) was the fourth least affordable major market. Highly elevated Median Multiples were also recorded in Melbourne (8.4), Auckland (8.0) and London (7.3).

Afford2It seems to me, on any of these measures, affordability is an issue, and spiraling house prices will probably lead to trouble later, either because they in turn fall, or households will extend themselves too far thanks to lax lending standards, and slip into mortgage stress. We will revisit our stress models shortly.

Bottom line is, which ever method you use to calculate these ratios, if you stick to a consistent method, the trend does not lie. And the trend is up – houses are simply not very affordable for many.

Household Housing Finance Ratios

Yesterday the RBA published its latest chart pack, which provides a range of pictures from their statistics. One of the most telling charts relates to various household ratio trends. Today we look at those relating to housing.

Here is the chart, which we recreated from the underlying RBA data:

RBAHousing1The ratio of housing debt to housing assets is at the top of its range. This is consistent with our earlier analysis showing that households had more debt than ever.

The trend ratio of disposable income to debt is as high as ever it has been. We looked at household disposable income by segment, against house prices recently, and we showed that apart from the most wealthy, income had grown more slowly than house prices, (we used Sydney as an example).

Some have argued recently that house prices have not really grown that much, if you take inflation into account:

“The important thing to keep in mind however is that when you consider inflation, dwelling values remain lower than their previous peaks in every city”.

However, the ratio analysis published by the RBA nicely skirts round this because inflation will be impacting both sides of the calculation, so isolating the results from underlying  inflation. The real-life impact of the current housing market is that households are stretched by high prices and big loans. First time buyers are worst hit, which explains why their mortgage stress levels are higher, and many potential first time buyers are sitting on the sidelines.

Very low interest rates have made larger mortgages more affordable, which is why the ratio of interest payments on housing to disposable income has come off its 2008 highs. The RBA chart shows movements in the average standard variable rate and discount home loan rate, and we overlaid the RBA cash rate. Note the divergence after 2007, the GFC widened spreads and disconnected market rates from the cash rate to some extent, as funding models and costs changed. Spreads remain extended although funding pressures have eased.

RBAHousing2Finally, here is a trend snapshot of average value of new loans.

RBAHousing3Loans are bigger than before the GFC (2007) indicating that the demand for bigger mortgages is being met by banks.

Overall, the housing affordability situation is not pretty, even at these low rates. By international standards we have sky high prices.

Down the track I see an unfortunate contention. If the RBA needs to raise rates to counter inflationary pressures, it may be hampered by the impact on households with high debt levels. Even small rises in interest rates will have a significant dampening effect. Households are more exposed to potential rate movements than ever.

The Truth About Savings – Part 1

There has been much discussion about the savings behaviour of households recently. The starting point is the ABS Savings Ratio Data, which is derived from the national accounts statistics. It shows that after the 2007/2008 GFC hiatus Australian households started to saving, and save hard. The following chart shows the trend from 2000, both in terms of gross disposable income, and the savings ratio, which on average is at over 10%.

Saving1

There are a series of questions flying about, for example, are the calculations accurate, or should elements like obligatory superannuation contributions be ignored, as they are forced savings? How to account for advanced mortgage repayments? Will the trend continue, or given the low current savings rates, flip to consumers spending more, and saving less, as the RBA seems to want to encourage?

Well, DFA has started to unpick this complex picture. The starting point is to apply segmented analysis to the data. So today, we present some of our segmented findings, using the data from our household survey. At once, we find averages are hiding important differences. So for example, Down Traders, those looking to sell and release capital, and possibly make additional property investments, reveal very significant income growth, and have a savings ratio of about 15%. They are the most cashed up sector of the population, partly in preparation for retirement, and partly thanks to recent property price gains.

Saving2

Compare this with First Time Buyers. These households have not seen much income growth in recent times, and their net savings ratio has fallen close to zero. As we have highlighted previously, many first time buyers are struggling with rising credit card debts. They have little left in the tank for emergencies, like sudden illness or unemployment.

Saving4FTB

Our “Want to Buy” segment shows quite similar trends to the First Time Buyer, though with slightly more savings, revealing a savings ratio of 3%, but falling.

Saving5WTB

We won’t present the analysis of all the segments in our survey, but the data from the Investor segment is enlightening. Here we see quite significant income growth, but savings are falling. This could be because they have been spending hard to grab more property. We need to look at detailed survey responses to check this.

Saving3Inv

So, the conclusion we have reached is that whilst overall savings may be up, it is split across different household groups, some are savings hard, still, others are seeing the cost of living eat into free cash, so savings are down. The key question for me is, how to encourage down traders to spend more, when they are saving for retirement, turning more of their assets into cash. and building a defence against future uncertainty. In addition, we should not assume that because average savings ratios are high, everything is fine. It’s not, because, again, averages mask important differences.

In part 2 of our analysis, probably the last post before the Christmas break, we will look at where segments are saving, and also examine segmented household plans for saving in 2014. This will help to answer some of the questions raised above.

 

More Households Excluded From The Property Market

Overnight the AFR released a long interview with Glenn Stevens, including coverage of the property market. He is not that worried about house price growth if it is decoupled from credit growth. However, the DFA Household survey  as published in the “Property Imperative” showed clearly that rising house prices have a damping economic impact as first, more are excluded from the market, and second those who are in the market need to deploy ever more of their disposable income to stay there.

Glenn Stevens quotes are interesting:

“So to that extent I haven’t found it (housing market developments) that troubling or constraining, and I think the other thing to say is the price rises that worry you most are the ones driven by rising leverage”

“I think if we saw a return to the kind of double digit credit growth to households that we saw for so many years in the past, I would have to wonder whether that would be wise given the level of debt from where we start. That would be a different proposition to what we’ve seen lately so thus far, I think it’s okay but obviously, it’s a thing we have to watch.”

“To come to your point about risk, I think the key thing to keep your eye on is the leverage. If we have an asset bubble in some asset class and it isn’t with borrowed money, I’m a lot less worried. You know, if there’s a boom and bust in rare coins or art or something, or even minor segments of property where it’s not – where you haven’t got the banking system geared into it, well, you know, I’m not sure that’s kind of a macroeconomic policy concern. But where you’ve got an asset class with a lot of leverage building up behind it and risks to the lenders, as well as the borrowers, that’s really the issue. So that’s why I say I think it’s important to note that to date we haven’t seen a big rise in leverage in the housing market so far.”

The DFA Household survey includes an examination of households into those which were property inactive, and those who were property active. Property inactive households were defined as those who currently rent, live with parents, or are homeless, with no plans to enter the market. Property active households are those who own, or actively desire to own property, either as an owner occupier, or as an investor, and either own the property outright, have a mortgage or are actively looking.  The analysis shows that about 26 percent of households are Property Inactive, which equates to about 2.3 million households.

Inactive1

Examining prior years data, and applying the same analysis, we discovered that even correcting for population growth and migration, the property inactive proportion of the household population has been steadily increasing.

Inactive2

Finally, we looked across states, noticing some regional variations.

Inactive3

The rise in house prices is the major barrier to people who want to buy but cannot.

Inactive4

We also found that many households in the market were just about managing, despite low interest rates, because of rising costs of living, including power, rates and child care. First time buyers are particularly hard hit.

So, if we are to tackle the current market failures in the property sector, we need to focus on building, more, much more property; removing incentives for leveraged investments; and perhaps the RBA should be taking more notice of absolute house prices, irrespective of credit trends.

To be clear, I am not convinced that the current price levels and trends are doing us much good, (apart from for those on the ladder already, the states harvesting greater stamp duty tax takes, the construction sector, the real estate sector, etc etc). Long term strategies need to be put in place to get the market back into equilibrium, but its not clear to me where responsibility should lay. The complexity of the stakeholders involved makes intervention by any single agency myopic.

The Truth about House Price and Income Growth

Data is often cited to show that on average, the ratio of debt to disposable income verses house prices track quite closely and so we are not in a house price bubble. However, the problem with averaging data is that in can mask important differences. DFA has completed analysis in the NSW market looking directly at the rise over time of house prices and comparing this with average disposable income growth across income bands. The net conclusion is that house prices are rising faster than average incomes. It shows that lower income groups have not enjoyed such strong growth when compared with the higher earning groups. Actually, the average disposable income in NSW since 2008 has only grown a little. This leads to the conclusion that the price income ratio have deteriorated. This in my mind suggests we should be concerned about the current house price momentum.

NSWIncomeandPriceNow, the debate has been on about whether we are in a house price bubble or not. Often a bubble is not recognized until price deflation corrects it. The classic bubble shape of the South Sea Bubble is often cited and is an interesting case study.

South Sea BubbleWe do not have the same rapid rise in house prices, so technically we may not be in a bubble. Actually what we have is worse, as it is long term systematic issue, with property absorbing an ever greater proportion of household income. This is both people saving for property and servicing debt. My earlier posts references the recent ABS study on this.

As the drive to own property in Australia remains strong, households will do what they can to get into the market, and this means directing more income to acquiring property, leaving less for other activities.  High and rising house prices are a bad thing for the broader economy as it blots up otherwise discretionary spending. Retail and other sectors are being negatively impacted by this need to spend.

But my main point is we need to move away from averaging statements, and dive into the detail to see what is really going on.