Data released by the Reserve Bank of Australia (RBA) shows the ratio of household and housing debt to disposable income continues to climb.
- The latest ratios of household finances highlight that the ratio of debt to disposable income is at a record high however, the value of household assets is also at a record high level;
- With record low interest rates, the ratio of interest payments to disposable income is the lowest it has been since early 2003;
- The ratio of household and housing debt to disposable incomes are each at historic highs of 186.3% and 133.8% respectively with the ratios increasing by 3.4% and 4.3% over the past year;
- Over the period from 1988 to 2015 standard variable mortgage rates have fallen dramatically and that has surely contributed to household’s preparedness to take on more debt.
Over recent years the ratio of interest payments to disposable income has been falling with the ratios for households and housing now sitting at their lowest levels since 2003.
The higher ratio of interest payments currently compare to 1988 when interest rates were substantially higher.
This is reflective of the much higher cost for household assets, particularly the cost of residential housing.
The data shows that although households have significant debt, particularly for housing, the value of the assets they hold is substantial.
The ratio of household debt to disposable income is currently 186.3% however, the ratio of household assets to disposable income 862.8%, the highest it has ever been.
Similarly, the ratio of housing debt to disposable income is 133.8% however; the ratio of housing assets to disposable income is 471.3%.
What is interesting is that the ratio of household assets to disposable income is still lower than its previous peak in December 2007 at 476.2%, however, it is nudging back up towards its previous record high.
The value of household assets is significantly greater than the value of the debt.
Based on this data, the ratio of household debt to assets is 21.6% and the ratio of housing debt to housing assets is 28.4%.
Australian households are heavily indebted due largely to residential housing and while high; the value of the assets held is much greater than the debt.
It’s important to consider that this is a national view.
Across different regions the ratios are likely to be substantially different.
Furthermore, lower interest rates and a fairly strong labour market over recent decades have contributed to a willingness to borrow.
Should either of these factors to change it could lead to a dramatic deterioration in the value of these assets while of course the debt would remain.
Importantly, mortgage arrears remain low and the Reserve Bank has reported that the typical mortgage holder is currently more than two years ahead on their mortgage repayments.
This coupled with higher rates of household savings provide a potential buffer if unemployment were to rise sharply or interest rates began to increase.