According to the ABS, total household assets were recorded at a value of $12.6 trillion at the end of 2018. Total household assets have fallen in value over both the September and December 2018 quarters taking household wealth -1.6% lower relative to June 2018. While the value of household assets have fallen by -1.6% over the past two quarters, liabilities have increased by 1.5% over the same period to reach $2.4 trillion. As a result of falling assets and rising liabilities, household net worth was recorded at $10.2 trillion, the lowest it has been since September 2017.
Based on this data from the ABS, the Reserve Bank (RBA) calculates a number of household finance ratios.
The first metric detailed from the RBA are the ratios of household and housing debt to disposable income. As at December 2018, household debt was 189.6% of disposable income, a record high and up from 188.7% the previous quarter. Housing debt was also a record high 140.2% of disposable income and had risen from 139.5% the previous quarter.
While debt levels are quite high, the ratios of asset value to disposable income are much higher. While that may be the case, it is important to understand that if asset values fall, the value of the debt typically doesn’t reduce at the same speed, which can lead to asset value erosion. As at December 2018, household assets were 927.9% of disposable incomes. This ratio has declined as property values have fallen, down from a peak of 962.1% in December 2017. Similarly the ratio of housing assets to disposable income is currently 495.3%, down from its peak of 529.7% in December 2017. The 495.3% figure is the lowest it has been since September 2016.
As a result of a reduction in the ratio of assets to disposable income, the ratio of debt to assets is climbing. Total household debt is now 20.4% of household assets, the highest it has been since March 2016. Total housing debt is 28.3% of total housing assets, the highest it has been since September 2014. Again, this reflects the fact that asset values are falling as debt increases.
Despite generational low official interest rates, the measures of interest payments to disposable income have risen over recent quarters. This is likely reflective of lenders lifting interest rates independently of any adjustment to the cash rate by the RBA. Household interest payments represented 9.1% of household disposable income in December 2018, their highest share since September 2013. Housing interest payments accounted for 7.6% of household disposable income in December 2018, their highest share since March 2013. Despite the cash rate tracking at generational lows, households are paying a proportionally higher share of interest than they have in many years.
With housing values falling and expected to keep falling, the ratio of assets to disposable incomes is likely to fall over the coming quarters. Although most households will likely remain in a position whereby the value of their assets is significantly higher than their debt, no doubt an increasing number of recent property purchasers will have higher levels of debt than the value of their asset. This is probably an area of most concern for the RBA. If this leads to reduced consumer expenditure an in-turn slower economic growth it may be a trigger for either lower official interest rates or changes to mortgage lending policies (or both). Furthermore, with household debt at record highs and households dedicating more of their income to servicing their debt at a time when interest rates are so low if household debt levels haven’t declined by the time interest rates rise it could create more challenges for households.
This data will be very important to focus on over the coming quarters.