Snapshot: Household Debt in Australia

Despite the Australian property market demonstrating its resilience in the face of COVID19, there is still concern about the substantial increase of household debt levels, which have risen significantly over the past thirty years.  In June 1990, the ratio of household debt to annual disposable income peaked at 68%; and in June 2020 it is now at a whopping 185%.

Most of the debt held by households is housing debt, which comprises around 76% of overall household debt.  Thirty years ago, housing debt comprised a much smaller 46% of overall household debt.

However, it is also important to note that the value of assets held against the debt has also recorded a significant increase, pushing household net worth to record highs at the end of 2019.  Residential dwellings comprise the most significant portion of household assets, comprising around 53% of household wealth.

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.  The ratio of housing interest payments to household disposable income has more than halved since 2008, from a high of 13.3% to 6.4% in June 2020.  With interest rates moving lower since June, it is likely the ratio has fallen even further.

Another factor helping to minimise risk is the fact that asset values are substantially higher than the debt held against them.  The ratio of household debt to household assets was 19.4% and the ratio of housing debt to housing assets was 28.2% in June 2020, implying a remarkably large amount of equity is held within the household sector.

It is clear that households became more risk averse through the worst of the COVID period.  National accounts data showed the household saving ratio sky-rocketed to almost 20% through the June quarter, up from 2.5% in the June quarter of 2019 – a staggering increase!  Given that the virus curve has flattened, and consumer sentiment surged in recent months, it is likely the saving ratio will drop.

So, what are we looking at in the longer term? What does all this mean for the economic outlook?

Although the risks around high household debt is manageable at the moment; long-term interest rates will eventually rise. As debt servicing costs move higher, a heavily indebted household sector would need to dedicate more of their income towards servicing debt and less to spending, which implies a medium-to-long term risk to household spending, staggering, and slowing economic recovery.

Finally, with household debt remaining high, the sector is more exposed to unforeseen events such as job loss and illness, as well as events like a global pandemic or financial crisis.

All in all, this is an area our policy makers will be paying close attention to over coming years, for good reason.

Information sourced from CoreLogic and Australian Bureau of Statistics.