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<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>Australian household debt levels have increased substantially over the past three decades, the ratio of household debt to annual disposable income rising from 68 per cent in June 1990 to a recent peak of 188.5 per cent in June 2019.</p><p>Since June last year, the ratio has reduced slightly to 185 per cent.</p><p>Most of the debt held by households is housing debt, which comprises around 76 per cent of overall household debt.</p><p>Thirty years ago housing debt comprised a much smaller 46 per cent of overall household debt. </p><p>The skew towards housing debt can also be seen in the latest Household Income and Wealth survey from the Australian Bureau of Statistics. </p><p>It showed the median value of debt held against owner-occupied dwellings was $102,600, compared with a median debt level of $5,000 for student loans, $3,000 on credit cards and $3,700 on car loans.</p><p><strong>Household, housing debt to income ratio</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/43b031af-c9a5-4ae5-b040-38f55c849bf6.jpg" width="800"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sup><sub>^ Source: CoreLogic, RBA</sub></sup></p><p>Most of Australia’s household debt accrual occurred between 1990 and 2010. </p><p>The ratio of household debt to income increased by 45.7 percentage points between 1990 and 2000, and by another 49.3 percentage points between 2000 and 2010. </p><p>The past decade has seen growth in the ratio more than half to 21.5 percentage points, with most of that growth aligned with the property boom between late 2012 and 2017.</p><p>Importantly, the value of assets held against the debt has recorded a more significant increase, pushing household net worth to new record highs at the end of 2019.</p><p>Residential dwellings comprise by far the largest component of household assets, totalling $6.8 trillion, or 53 per cent of household wealth.</p><p>Household debt levels are important for two reasons.</p><p>Heavily indebted households are generally more vulnerable to a shock such as job loss, illness or a sharp rise in the cost of debt, which in turn has implications for financial stability.</p><p>The other key area of concern relates to household spending; heavily indebted households may be more likely to save rather than spend during periods of uncertainty or economic hardship. </p><p>With around 60 per cent of Australia’s economy dependent on household consumption, a sustained drop in spending activity would have a negative impact on economic growth.</p><p>These risks were recently covered in detail by the RBA in a discussion paper released in May this year. </p><p>The outcomes of the paper noted the risk to financial stability was likely to be relatively low due moderate loan-to-valuation ratios on residential mortgages. </p><p>In separate analysis from the latest Financial Stability Review, the RBA notes that only 3 per cent of Australian mortgages are thought to be in negative equity. </p><p>The risks associated with high household debt levels weighing on consumption are more substantial, especially under a scenario where housing prices fell.</p><p>While household debt is high, and potentially a concern for consumption, servicing debt is at its most affordable since 1999 due to record low interest rates. </p><p>The ratio of housing interest payments to household disposable income has more than halved since 2008, from a high of 13.3 per cent to 6.4 per cent in June 2020. </p><p>With interest rates moving lower since June, it is likely the ratio has fallen even further.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Ratio of interest payments to income</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/1fb93fcd-8553-42cc-a6de-95c4cdc5d0d5.png" width="795"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>Another factor helping to minimise risk is the fact that asset values are substantially higher than the debt held against them. </p><p>The ratio of household debt to household assets was 19.4 per cent and the ratio of housing debt to housing assets was 28.2 per cent in June 2020, implying a remarkably large amount of equity is held within the household sector.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Ratio of debt to asset value</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/84ef83ac-d1df-4ffd-9852-f0e3eac33e6d.png" width="907"/></picture><div></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>Other factors helping to alleviate risk associated with high household debt, and potentially support a reduction in debt levels are credit policy and less consumer appetite for credit.</p><p>Lending standards have improved over the past five to ten years, with a trend towards fewer loans originating with a high loan to valuation ratio and substantially fewer interest only loans. </p><p>There were 9.2 per cent of home loans originated with a deposit of 10 per cent or less in June this year, down from a recent peak of 22 per cent in 2009. </p><p>Similarly, interest-only loans comprised almost 46 per cent of new home loans in mid-2015, but have averaged only 17 per cent of new lending since mid-2017.</p><p>Additionally, loans with a high loan to income ratio have remained low, with June data showing only 5.8 per cent of new home loans were originated with a loan to income ratio of 6 per cent or higher.</p><p>It is clear that households became more risk averse through the worst of the Covid period. </p><p>National accounts data showed the household saving ratio sky-rocketed to almost 20 per cent through the June quarter, up from 2.5 per cent in the June quarter of 2019. </p><p>Given that the virus curve has flattened and consumer sentiment surged in recent months, it is likely the saving ratio will drop.</p><p>Additionally, the trend in personal credit, which has been in negative monthly growth territory since late 2019, has plummeted since March.</p><p>Although the risks around high household debt are manageable at the moment, interest rates will eventually rise down the track.</p><p>As debt servicing costs move higher, a heavily indebted household sector would need to devote more of their income towards servicing debt and less to spending, which implies a medium-to-long term risk to household spending.</p><p>This implies high debt levels may also stagger and slow an economic recovery. </p><p>If increases in housing debt servicing costs result from higher interest rates, the exacerbated drag on spending could slow economic growth.</p><p>Additionally, with household debt remaining high, the sector is more exposed to unforeseen events such as job loss and illness, as well as black swan events like a pandemic or financial crisis.</p><p>It is likely policy makers and regulators will be keeping watch for any signs of rising household debt or slippage in lending standards that could lead to higher household debt. </p><p>Higher LVR lending or higher loan to income ratios could be the trigger for a new round of macro-prudential style intervention. </p><p>Recent macro-prudential interventions targeted interest only lending and growth in lending for investment housing through 2014 and 2019. </p><p>Future interventions may be aimed at keeping a lid on household debt levels, and minimising longer-term risk, via firm limits on loan to valuation ratios, loan to income ratios or debt to income ratios.</p></div></div></div></div></div>

Australian household debt levels have increased substantially in the past 30 years, from 68 per cent in June 1990 to a recent peak of 188.5 per cent.

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<div class="row" data-reactroot=""><div class="cell cs12 cx12"><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>With property prices on course to lift to <a href="https://theurbandeveloper.com/articles/how-long-until-housing-values-reach-a-new-record-high">record highs</a> in the first half of 2020, <a href="https://theurbandeveloper.com/articles/investors-first-home-buyers-drive-12pc-rebound-in-lending">first-time buyers</a> and those <a href="https://theurbandeveloper.com/articles/buyers-back-in-the-market-as-auctions-rebound">re-entering the market</a> could soon be priced-out, further eroding any renewed prospects of housing affordability. </p><p>After almost two years of falling prices of between 10 and 15 per cent in Sydney and Melbourne, the housing market is showing signs of <a href="https://theurbandeveloper.com/articles/house-prices-make-biggest-jump-in-4-years">bouncing back</a> driven by a number of factors including <a href="https://theurbandeveloper.com/articles/075-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-as-finished-cutting-the-cash-rate">record low interest rates</a>, easier access to credit and more certainty around tax arrangements.</p><p>Housing affordability enjoyed temporary relief over the downturn, seeing an 8.4 per cent fall in prices with dwelling values 6.5 times higher than gross annual household incomes as of June, the lowest level since December 2013.</p><p>According to the latest ANZ-CoreLogic Housing Affordability report, the 8.4 per cent falls in real estate prices nationally—seen over the past two years, has now significantly reversed, with prices in Melbourne and Sydney <a href="https://theurbandeveloper.com/articles/is-the-downturn-over-house-prices-begin-to-rise">rising</a> 6 per cent and 5.3 per cent respectively since May.</p><p>Dwelling values are now outpacing household incomes across all capital cities (with the exception of Perth and Darwin) with over-extended household debt and rising mortgage rates reversing affordability and playing a larger role influencing the broader economy.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><div><picture><img src="https://tud-prod-tudmedia-oj9w2zshuo0o.s3.amazonaws.com/raw/images/f9d6ab98-1e72-4824-a0a5-7fed211505a6.jpg" width="800"/></picture><div><span style="align-content:center;opacity:0.8">▲ Affordability is influenced by interest rates, the size and term of loan repayments, and household income. Image: AAP</span></div></div></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><br>“We see more urgency coming back into the market and if this trend continues, we could see property prices reach new highs early next year,” Corelogic head of research Tim Lawless said.</p><p>“We have also seen an increase in the number of areas where it is cheaper to buy than rent, which can be attributed to the lowest interest rates since the 1950s together with lower housing prices relative to the market peak.”</p><p>The downturn has seen the number of years to save for a deposit decline drastically, back to 2014 levels, across the country.</p><p>Households are now also dedicating the smallest proportion of their incomes towards paying a new mortgage since early 2004 and renters are spending the lowest proportion of their income on accommodation since 2007.</p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><strong>Housing affordability in numbers</strong></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p><sub>• 8.6 years - the time it takes a typical household to save 20 per cent deposit for a dwelling based on saving 15 per cent of their gross annual income<br>• 34.4 per cent - the proportion of income needed to repay a 80 per cent loan to value ratio mortgage as of June 2019, the lowest it has been since 2004<br>• 28.5 per cent - the average percentage of household income required to rent a house as of June 2019</sub></p></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><hr/></div></div></div><div class="row ci"><div class="cell cs12 cx12"><div class="ci cl"><p>With prices likely to continue their upward trajectory on the back of the latest rate cut, an increasing number of Australians have little to be excited about.</p><p>The latest wages growth figures released last week by the ABS also has revealed that growth has distinctly slowed, with the worst results since the middle of last year, lifting by just 0.5 per cent.</p><p>Earnings are believed to be on course to grow by just 2.2 per cent for the year and economists expect that number to fall further as unemployment ticks up.</p><p>The ratio of household debt to disposable income is about 190 per cent, according to Reserve Bank calculations, compared to 70 per cent at the beginning of the 1990s that then rose to 160 per cent at the time of the GFC.</p><p>Sydney remains the least affordable market for buyers, followed by Melbourne.</p><p>Last month, the Morrison government has announced further details of its <a href="https://theurbandeveloper.com/articles/first-home-buyers-scheme">first-homebuyer deposit</a> election promise that stands to benefit up to 10,000 Australians each year and is set to kick off from January next year.</p><p>In an attempt to reboot housing sentiment, the government announced price caps for support through the scheme, which is $700,000 for a house in Sydney and $600,000 in Melbourne.</p><p>First homebuyers will only have to save 5 per cent of a deposit under the plan, with the federal government to guarantee the difference of a standard down payment.</p></div></div></div></div></div>

First-time buyers and those re-entering the market could soon be priced-out.

HOUSEHOLD INCOME