Overall household debt, asset values at record highs

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Data recently released by the Australian Bureau of Statistics (ABS) and analysed by CoreLogic showed that household net worth has increased significantly over the last few years. However, household debt has also climbed to new heights. 

The ABS’ data on finance and wealth for the December 2016 quarter showed that the overall net worth of Australian households was $9.405trn. This compromised $11.710trn in assets minus $2.306trn in liabilities (including share capital).  

“Over the 12 months to December 2016, net worth has increased by 8.3% with asset values increasing by 7.9% and liabilities increasing by 6.4%. The data breaks out the value of residential land and dwellings which as at the end of 2016 was valued at $6.114 trillion having increased by 8.3% over the year. Residential land and dwellings accounts for 52.2% of total household assets,” the CoreLogic report said.  

Ratio of household debt to disposable income highest on record 

Using data published by the ABS on wealth, the Reserve Bank publishes a number of financial ratios for households. These ratios compare debt and assets to disposable incomes. 

Towards the end of last year, the ratio of household debt to disposable income was recorded at 188.7%. This ratio is the highest on record, rising by 1.6 percentage points over the quarter and 3.1 percentage points over the year. 

Meanwhile, the ratio of housing debt to disposable income was recorded at 133.8%, also the highest on record. Based on this data, 70.9% of total household debt was housing debt. 

Housing debt increased by 1.5 percentage points over the quarter, and was 4.5 percentage points higher over the year.  

Ratios of household and housing assets to disposable incomes at record highs

The ratio of housing assets to disposable income is now 910.6%, having increased by 23.2 basis points over the quarter and 42.2 basis points over the year. Moreover, the ratio of housing assets to disposable income is now 500.4%, having increased by 18.2 basis points over the quarter and 23.8 basis points over the year.

“Comparing household debt to assets results in a ratio of 20.7% while the figure for housing debt to housing assets is 26.7%. This indicates that although household and housing debt is at an historic high level, the value of the assets that this debt is held against is also higher than it has ever been,” the CoreLogoc report said.  

Financial position likely to be weaker in smaller geographies 

CoreLogic warned that their report should be viewed with “some caution” as their analysis isn’t granular. Hence, while the national figures may show a strong financial position, the picture is radically different in smaller geographies, particularly where dwelling values are falling.

“This report is based upon a national view. What we need to remember is that Australia is made up of many different property markets, and there will be some markets where the people have come to the party too late, such as Sydney and Melbourne,” said Tyron Hyde, director of Washington Brown. “That’s where you find borrowers who’ve borrowed too much and [would get] into trouble if property prices went back just 10%.” 

“This is conceivable where developers have built a lot of units in one spot. Look for places where there is a high concentration of cranes in the sky. These areas are more susceptible to a downturn because you’re mass-producing units. Investors who’ve come to the party too late may find themselves over-borrowing and [are] rendered vulnerable to rising interest rates,” Hyde said. 

The CoreLogic report also highlighted the financial vulnerability of households in smaller geographies where dwelling values are declining. “For those that have either recently purchased, bought at the peak of a market which has since declined, or those using interest-only mortgages they are unlikely to be in such a strong position as the national figures indicate. Those that don’t own a property asset are also likely to have substantially less household assets than those that do own a home,” the CoreLogic report said.

Related stories:
CoreLogic: Capital Gains Performance Lower This Decade
Falling Rents, Loss Of Tenants Could Jeopardise Investment Portfolios 


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