Household and business balance sheets improve

Things are not as bad as some commentators are making out.

In his weekly market update Craig James, Chief Economist for Commsec explains that the average Australian household is in pretty good financial shape.

Here’s what he had to say:

Household and business balance sheets improveCraigJames

  • Household accounts: on Thursday, the Australian Bureau of Statistics (ABS) released data showing household wealth at a record high at the end of December. On Friday, the Reserve Bank released data on household and business balance sheets and financial ratios.
  • Household net worth: the Reserve Bank calculates household wealth or net worth at a record $7,297 billion at the end of December, up 2.6% in the quarter. The value of all homes was estimated at $9,448 million, up 1.6% over 2014.
  • Debt servicing: the ratio of household interest payments to disposable income remained at 11-year lows in December 2014. Housing debt represented 7.2% of disposable income.
  • Better Business: business financial assets rose by 3.4% in the December quarter, outpacing a 1.6% lift in liabilities.

What does it all mean?

Every so often an analyst will try and create a scare story about household debt.RBA

But every quarter, the Reserve Bank silences the concerns by producing data showing the true position of household balance sheets.

In short, Aussie consumers have taken on more debt, but the value of the assets purchased has increased at a faster rate. So, wealth is at record highs. And with interest rates low, the ability to service the higher debt load has continued to improve – holding at the best levels in 11 years.

Australian families have become richer over time, causing the share of essential expenses to fall as a share of spending and income. That means that families can take on more debt without the higher payments creating servicing problems or causing people to cut spending on other goods or services.

And it’s not just household balance sheets improving – business balance sheets continue to improve with the value of financial assets outpacing liabilities.

The bottom line is that consumers and businesses can borrow and spend more – they just need to get over confidence issues.

What do the figures show?

Household & business ratios at December quarter 2014:

  • The ratio of household debt to assets fell from 16.9% to a 6 1/2-year low of 16.7%.
  • The ratio of housing debt to housing assets fell from 28.1% to a 3 1/2-year low of 28%.
  • Housing assets stood at 813.8% of income while household debt was 153.8% of income.
  • Debt servicing improved – household interest payments were 8.9% of disposable income, steady over the quarter and the lowest since December 2003 (11 years)
  • Business loans rose by 2.2% to a record high of $754 billion at December 2014. Total business liabilities rose by 1.6% to $2,717 billion.
  • Business financial assets rose by 3.4% to a record $1,056 billion at end December.
  • Business financial assets represented 38.9% of liabilities, an 18-month high and above the 36.3% long-term average.

What is the importance of the economic data?

The Reserve Bank releases data on Household Finances & Household ratios on the last Friday of March, June, September and December.

The is useful in gauging the true state of household finances and is helpful in gauging prospects for consumer businesses.

What are the implications for interest rates and investors?

The Reserve Bank data backs up the data from the ABS – household balance sheets are in strong shape – as are business balance sheets. Eventually people will start embracing record low interest rates by lifting borrowing, spending and investing.

The data should allay retailer concerns about the ability of Aussie families to lift spending over 2015.

The Reserve Bank may still cut interest rates, but there is no pressing need.


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit

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