Household debt is offset by asset wealth

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The ratio of household debt to disposable income was recorded at 193.7% at the end of June, and now sits at a record-high, having increased by 2% over the quarter and by 3.9% over the year, according to the latest quarterly household finance data from the Reserve Bank of Australia (RBA).

The latest data from the central bank shows that while household debt is growing, asset wealth is increasing at the same time.

Cameron Kusher, head of research at CoreLogic, said it was not surprising that most household debt was housing related. The ratio of housing debt to disposable income is recorded at 136.4%, having increased by 1.4% over the quarter and 3.9% over the year.  

“Clearly, household and housing debt has increased over time relative to disposable incomes. Of note is that since the financial crisis, the rate of escalation has slowed,” Kusher said.

Of the 136.4% ratio of housing debt to disposable income, 103.2% is held by owner-occupiers, and the remaining 33.2% by investors.

Record levels of household debt pose risks

“The latest household finance data from the RBA highlights that Australian households are heavily indebted, largely due to housing. While debt levels are high, the value of household and housing assets are, at this stage, considerably greater than the level of debt,” Kusher said.

“Of course, if household and housing asset values begin to fall in the future, the accompanying debt may not fall at the same rate and that remains the main concern with the ongoing increase in household and housing debt.

“Although Australia survived the financial crisis with much less damage than many other countries, of note was the fairly sharp rise in the ratio of household and housing debts to assets over that period. A more sustained downturn could potentially see a much greater increase in these ratios as asset values fall but the debt against these assets remain,” Kusher said.

Household debt could lead to greater risks down the road

While increased household debt can boost an economy in the short term, the International Monetary Fund (IMF) says it leads to greater risk three to five years down the road.

“In the short term, an increase in the household debt-to-GDP ratio is typically associated with higher economic growth and lower unemployment, but the effects are reversed in three to five years,” the IMF warned in its latest review of ­global financial stability. “Moreover, higher growth in household debt is associated with a greater probability of banking crises.”

The IMF said Australia is one of the countries most exposed to a “debt hangover,” with household debts rising to more than 100% of GDP compared with an advanced-country average of 63%.  


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