Ratio of household debt to disposable income rises

By Michael Mata | 06 Apr 2018

Earlier this week, the Reserve Bank of Australia (RBA) released its latest household finance ratios, making it clear that the “ratio of household and housing debt to disposable income continued to climb over the December 2017 quarter, reaching a new record high,” according to CoreLogic’s most recent Property Pulse.

Each quarter, the central bank 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,” CoreLogic said.

By the end of 2017, the ratios of household and housing debt to household disposable income had risen to record 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,” CoreLogic said.

While the ratio of household and housing debt to disposable income has surged to record highs, so has the ratio of household assets to disposable income. Meanwhile, the ratio of housing assets to disposable income is close to hitting a record high too. As of December, the ratio of household assets to disposable income was 961.5%, and the ratio of housing assets to disposable income was 525.3%.

“Both ratios rose over the quarter and were 4.2% and 4.1% higher respectively over the year,” CoreLogic said.

Based on the ratios of household and housing debt to assets, the Reserve Bank’s data shows that the value of household and housing assets is substantially greater than the value of the debt. At the end of last year, these ratios were 19.6% for household debt to assets and 26.4% for housing debt to housing assets—unchanged from the ratios recorded in 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),” CoreLogic said.

“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.”

Over recent years, the value of household assets has been rising at a more rapid rate than the value of debt. Over the past year, there has been a marked slowdown in the increase in household assets, while household debt has continued to expand at a relatively 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.”

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