On the back of low mortgage rates and rising home values the level of household and housing debt is continuing to increase.

On the back of low mortgage rates and rising home values the level of household and housing debt is continuing to increase.

Each quarter following the release of the finance and wealth national accounts by the Australian Bureau of Statistics (ABS) the Reserve Bank publishes its household finance ratios. These updated ratios for March 2015 were released at the end of last week and provide an important measurement around the extent to which households are leveraged.

The ratio of household debt to disposable income is recorded at 155.9% which is a record high. Furthermore the ratio has increased by 2.7% over the past year; its greatest annual increase since the 12 months to June 2010. As the chart shows the level of debt had been relatively flat for a number of years however, it started to climb once again following a low point in the June 2012 quarter and has since increased from 145.4% to 155.9%. The increase in the ratio coincided with the returning growth in home values across the capital cities.


Ratio of debt to disposable income over time


The ratio of housing debt to disposable income was recorded at 142.1% in March 2015, accounting for a record high 91.2% of total household debt. To highlight just how much of a focus there is on housing debt, 30 years ago housing debt accounted for 65.6% of household debt. Much like household debt, housing debt had been relatively flat over recent years and began to increase once again after a low point in June 2012. Since June 2012 it has increased from 130.8% to 142.1%.


Ratio of housing debt to disposable income over time


Breaking this data out into owner occupiers and investors shows that debt to investors has a lower ratio but is growing much faster than debt to owner occupiers. Owner occupiers have a debt to income ratio of 93.1% compared to 49.0% for investors. The ratio of debt for owner occupied housing has increased from 88.0% in June 2012 to 93.1% in March 2015 compared to investor housing which has jumped from 42.8% to 49.0% over the same period. In percentage terms owner occupier debt has increased by 5.8% over the period compared to a 14.5% increase in investor debt.


Ratio of assets to income over time


Although household and housing debt is increasing, so too are the value of these assets; in fact asset values are increasing at a faster pace than the accumulation of debt. As at March 2015, the ratio of housing assets to disposable income was 447.4%, the highest it’s been since September 2010. Similarly, the ratio of financial assets to disposable income was recorded at 356.4% its highest level on record.

While the level of debt is rising, the gearing of this debt continues to fall due to the rise in the value of these assets. The likely reason for the fall is the combination of low interest rates resulting in a more rapid repayment of debt and the growth in home values. The high household savings ratio is also a contributing factor, with many households focused on drilling down their debt levels while interest rates remain low and certainty around economic conditions is volatile. The RBA reports that the ratio of total debt to assets was recorded at 16.6% in March 2015, its lowest level since December 2007. The gearing ratio of housing debt to housing assets is predictably higher at 28.1% however, it is also trending lower. In fact, the ratio is at its lowest level since June 2011 and down from a recent peak of 29.9% in September 2012.


Ratio of debt to assets over time


The RBA is likely to be concerned with the ongoing rise in overall household and housing debt. The concern would be somewhat tempered by the fact that the value of the assets households own are also rising and the overall level of gearing is trending lower.

It's important to remember when looking at this data it is a national snapshot and ratios across individual regions may be very different. Obviously Sydney is seeing very strong growth in home values yet people are taking on more debt to enter the market. On the other hand, many capital cities have seen very little increase in the value of their housing assets over recent years. Of course people who have recently taken out a mortgage are likely to have a significantly higher level of gearing than those that have been paying off a mortgage for a number of years. This is important to remember particularly in the case of a downturn in the housing market, the potential arising problems in a downturn are unlikely to be geographically uniform.


Article by Cameron Kusher, CoreLogic RP Data senior research analyst.


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