Australian Household Debt
Australian Household Debt

The liabilities associated with Australian households have attracted significant discussion in recent months as some hedge fund managers look for an updated version of “The Big Short”, Michael Lewis’s story about the origins of the Global Financial Crisis being in the US residential housing market.

On measures of debt relative to disposable income, Australian households look heavily indebted: in an OECD study, only Denmark, Netherlands, Norway and Ireland ranked higher than Australia’s 205% debt as a proportion of disposable income.

Household debt as a proportion of disposable income (%)

Source: Organisation for Economic Co-operative and Development

Mortgages dominate Australian household debt: owner-occupier property borrowings represent nearly 60% of all debt across the country. Loans to investors comprise a further 35% of the household debt stock and that is likely to comprise further property loans and other items like margin loans for share dealing.

Ranking far below these classes are personal loans, student loans and credit card borrowings, each of which represents around 2% of the total household loan borrowings.

Constituents of Australian household debt

Source: Australian Bureau of Statistics

Australians have benefitted from steadily declining interest rates over the last thirty years, with current standard variable rate of 5.40% well below the average of 8.6% over the period.

That falling interest rate trend has enabled Australian households to weather the strong growth in debt across the nation. Debt as a proportion of disposable income has increased from 60% in 1988 to nearly 200% in 2015. At the same time, moderating borrowing rates have seen interest payments as a proportion of disposable income increase from 4.8% in 1988 to 7.0% today. So, whilst debt has nearly trebled, the associated interest burden has increased only 46%.

The danger is that consumers assume that low interest rates are the new norm and do not look to history as a guide to where debt burdens may lie in the future. As we examine in more detail below, a reversion to the mean interest rate of 8.6% would see monthly repayment mortgage payments increase by 34%.

Standard variable home loan rate

Source: RBA

Ratio of debt to household disposable income (%)


Source: RBA

Ratio of interest to household disposable income (%)

Source: RBA

Property Prices - the affordability issue

Those who are concerned about property prices point to data like that shown in the figure below, which shows property prices relative to average income for selected peer countries and demonstrates that Australian property has comfortably become the most expensive relative to incomes over the five years. On a broader comparison, only Hong Kong and Sweden have comparable ratios of property price to income.

Counter arguments about housing affordability comprise strong population growth in major cities like Sydney and Melbourne, as well as continuing interest in Australian property from overseas acquirers.

Ratio of Property Prices against average income for selected countries

(100 = long-run average)

Source: The Economist

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