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Has Debt Reached Worrying Levels?

Levels of indebtedness are on the rise, driven by growing mortgages. But are they a cause for concern?

Australians’ growing indebtedness has been making headlines in recent months. In January, UBS analysts sounded the alarm over ‘extremely elevated’ debts after the household-debt-to-income ratio hit 200% – one of the highest in the world. UBS’s estimates place total household debt at $2.466 trillion.

This realisation hit in late 2017, after the Australian Bureau of Statistics (ABS) started including mortgage debt held by self-managed super funds in its calculation of total household liabilities. The result was a 3% increase in total household debt.

Figure 1: Household debt to disposable income (%)

Source: Canstar, based on Reserve Bank of Australia (RBA) data and UBS estimates.

ABS data shows that in 2015–16, around three in 10 Australian households were ‘over-indebted’ based on the ratio of debt to income or assets. The growth in debt has outpaced that of incomes and assets, sending the proportion of over-indebted households up from 21% in 2003–04 to 29% in 2015–16.

While the proportion of households with some amount of debt remained nearly unchanged from 2003–04 levels – at 74% in 2015–16 – average household debt almost doubled from $94,100 in 2003–04 to $168,600 in 2015–16.

There is one major factor behind this increase: the mounting property debt.

A Mountain Of Property Debt

According to the ABS, property debt grew steadily over the past 12 years, rising from $78,400 in 2003–04 to $149,600 in 2015–16. In fact, over-indebted households were more than twice as likely as other indebted households to have a home loan, and about four times more likely to hold other property loans.

Analysts are blaming the increase in property indebtedness for rising mortgage stress, defined as the inability of a household’s net income to cover ongoing costs. In March 2018, research firm Digital Finance Analytics estimated that 30% of households in Australia – more than 956,000 households – were experiencing mortgage stress. The company expects this number to continue increasing as living costs continue to rise and wage growth remains stagnant.

Figure 2: Mortgage stress levels

Source: Digital Finance Analytics.

Should We Be Worried?

Despite the doom-and-gloom predictions from some analysts, the RBA doesn’t consider the risk from household mortgage stress to be acute.

In a speech last February, RBA Assistant Governor Michele Bullock acknowledged that debt levels are high and that some households are experiencing financial stress. But she pointed out that this group is not growing rapidly, implying that the risk to Australia’s wider financial stability is not so severe.

A survey of households with mortgage debt conducted by Household, Income and Labour Dynamics in Australia (HILDA) found that the median housing-debt-to-income ratio had risen over the past 10 years, to about 250% in 2016. Yet at the same time, Bullock said the median ratio of mortgage servicing payments to income had remained stable, coming in at 20% in 2016.

Lending Restrictions Continue

Lending has slowed down since the Australian Prudential Regulation Authority started clamping down on interest-only and investor loans. Banks have also tightened their own credit and serviceability assessment policies. The fall-out from the Banking Royal Commission has also prompted many lenders to toughen their standards, making it difficult for borrowers to get credit.

The overall effect could be a slowdown in borrowing and potentially, in the growth of debt.

Interest Rates Remain Low

Historically low interest rates are also helping borrowers manage their debts. In a statement in April 2018, RBA Governor Philip Lowe said low interest rates continue to support the economy. Progress in reducing unemployment and returning inflation to target levels – the central bank’s conditions for raising rates – is expected to be gradual. This should help keep interest rates at their record low point for much of 2018, giving borrowers some room to breathe.

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