Are Australian households taking on too much debt?
Well…that’s what some commentators are suggesting and that’s one of the excuses they’re giving for our property markets to crash.
However in a recent economic update the ANZ Bank have concluded that despite increasing to all-time highs, household debt levels remain ‘comfortable’ given growth in household income, interest rate levels and household assets.
While the bank forecasts a subdued Australian economic outlook in 2015, including 0.5% drop in RBA interest rates cuts, the unemployment rate drifting moderately higher in the coming months, the ANZ expects solid household finances and strong underlying drivers of the Australian housing market to support household (primarily mortgage) debt around current levels.
Consequently the Bank suggests it would take an unlikely severe economic shock (such as another Global Financial Crisis including a sharp increase in funding costs) – involving a sharp increase in interest rates (ie +150-200bps on current forecasts) combined with an escalation in unemployment and significant falls in house prices (-20/30% annual nationally) – to drive an episode of stressed household deleveraging.
Here are some more details from their report:
HOUSEHOLD DEBT: A HOUSE OF BRICKS OR STRAW?
Household debt has increased to an all-time high and is currently at a multiple of 1.7 times annualised household disposable income.
Despite increasing to all-time highs, household debt levels remain ‘comfortable’ given growth in household income, interest rate levels and household assets.
Household caution and stable economic conditions have capped household leverage in recent years.
While unlikely, household debt stress could be triggered by a sharp increase in interest rates combined with a step-up in the unemployment rate and negative housing equity.
THE CURRENT STATE OF PLAY: HOUSEHOLD DEBT IS HIGH, BUT MANAGEABLE
Commonly used household leverage measures such as the household debt to income ratio suggest that while household debt is at the highest level on record, household debt has broadly increased in line with household income since 2007.
In fact, following the sharp run up in household debt through the mid-90’s to mid-2000’s, which was driven by households capitalising the structural reduction in interest rates, growth in household debt has been subdued.
In recent years, a combination of low interest rates and cautious household behaviour has driven improved household balance sheets through solid debt repayments and elevated household savings.
MORTGAGE STRESS LEVELS LOW & DEBT SERVICING RATIO AROUND LONG-RUN AVERAGE… FOR NOW
Further, while household debt to income has picked up slightly in the past six months, there is little sign of financial distress amongst households.
Mortgage delinquencies are well below 0.5% of total mortgages and have been trending lower for most of the past year (Figure 5, see PDF).
Despite higher levels of debt, households’ ability to service their debt has improved markedly, primarily due to lower interest rates, with household interest payments as a proportion of income below long-run average levels (Figure 1).
BUT, NEGATIVE EQUITY + HIGHER RATES + UNEMPLOYMENT SHOCK = DISTRESS?
Notwithstanding the current manageable levels of household debt and our current forecast of steady expansion in Australian medium-term economic growth, under certain economic stress conditions households could see a sharp increase in debt stress, primarily through mortgage default.
Recent RBA research is consistent with our view that the most likely driver of mortgage defaults would be negative housing equity combined with a sharp increase in debt service difficulty, likely due to broad-based job losses and higher interest rates.
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