Earlier last week the Reserve Bank (RBA) published their latest household finance ratios which showed the ratio of household and housing debt to disposable income continued to climb over the December 2017 quarter, reaching a new record high.

Each quarter, the RBA publishes a spreadsheet of selected household finance ratios.  The data provides insight into the level of household indebtedness as well as the value of household assets.

The first chart shows the ratios of household and housing debt to household disposable income over time.  At the end of 2017, both ratios had increased to record high levels.  The ratio of household debt to disposable income was recorded at 188.6% and the ratio of housing debt to disposable income was 138.9%.  Over the past 12 months, the ratios have increased by 4.4% and 4.3% respectively.

Ratio of debt to household disposable income


While the ratio of household and housing debt to disposable income has risen to record highs, so has the ratio of household assets to disposable income.  The ratio of housing assets to disposable income is close to its record high.  As at December 2017, the ratio of household assets to disposable income was recorded at 961.5% and the ratio of housing assets to disposable income was recorded at 525.3%.  Both ratios rose over the quarter and were 4.2% and 4.1% higher respectively over the year.

Ration of assets to household disposable income


Based on the ratios of household and housing debt to assets, the RBA data shows that the value of household and housing assets is substantially greater than the value of the debt.  At the end of 2017, these ratios were recorded at 19.6% for household debt to assets and 26.4% for housing debt to housing assets.  Each of these ratios was unchanged from the ratios as at December 2016.  It is important to recognize a few things about this data.  Firstly, it is a macro view so there are households in a significantly weaker position (marginal buyers, recent buyers and owners in markets where values have fallen substantially) as well as households in a much stronger position (households that have held their properties for many years).  Secondly, this data looks at all households so includes those that carry no housing debt which is estimated to be around 40% of all households.  Also note that in periods in which dwelling values have fallen (2008 and 2010-12) there have been some sharp rises recorded in these ratios.

Ratio of household and housing debt to household and housing assets


Over recent years the value of household assets has been increasing at a more rapid rate than the value of debt.  Over the past year, there has been a deceleration in the increase in household assets while household debt has continued to expand at a fairly consistent pace.  With dwelling values now declining over the coming year(s) the value of debt may expand at a faster pace than the value of assets.

Annual change in household debt to income ratio vs houshold assets to income ratio


The lending market in Australia is currently evolving.  After very high levels of interest-only borrowing over recent years, recent quarters have seen substantially fewer new interest-only loans written and an increasing number of borrowers voluntarily switching to principal and interest.   This will mean that a higher proportion of borrowers are reducing their debt.  At the same time we have seen dwelling values begin to fall in major housing markets.  Although these falls to-date aren’t substantial, they will likely lead to a reduction in the value of housing assets.  At the same time, these value falls may result in fewer active buyers as they remain on the sidelines.  The result of both of these changes means that both household debt ratios and household asset ratios may see falls over the coming years.