Global Markets Research

Issues
25 July 2013

Household debt trends
„ Australian households have housing debt levels that are high by international standards. „ But income and asset characteristics of relevant households suggest that they can service the debt comfortably. „ Housing loans make up the largest component of household debt while housing is generally the largest asset. „ In the past few years Australian households have become more cautious about committing to higher housing debt and continue to save slightly more than 10% of their income, the highest level since the 1980s. „ The current period of low interest rates has seen households maintaining debt repayment schedules and consolidating their balance sheets. Gradually rising housing prices should enhance their net asset positions.

Australian household debt ratios are relatively high by international standards. But there are important economic and legal differences between housing markets that can sustain marked variations in housing prices. In Australia, it is also important to understand the economic and social characteristics of the households that have the debt. This note uses the considerable amount of research into household financial positions (published by the ABS, the RBA and other groups like the Melbourne Institute’s 2012 Household Income and Labour Dynamics in Australia (HILDA) report) which provide extensive insights into these household characteristics. The data and the surveys show that household debt has increased steadily over 2002-2010, primarily due to growth in housing-related debt. But the data and the surveys also indicate that the households who carry the most debt typically have stable characteristics. On average, these households are couples with good health, high educational attainment, relatively high and stable incomes and in a prime age category. On balance, Australian households are in a good position to service their housing and other debt. The net asset positions of the households are also important in judging their capacity to cope with adverse economic developments. One of the more interesting recent trends is that households have also increased their housing debt prepayments over 2012 and 2013, by leaving their repayments unchanged while interest rates fell. It is in line with the inclination to reduce housing and credit card debt since the GFC. Combined, these more cautionary shifts provide households with an important buffer to any negative economic shocks. Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. The general line is that a significant number of households are at risk of financial ruin if their economic circumstances, like employment, change adversely. The surveys, and the experience of the past few decades, does not, in our view, support those lines of argument. The experience of the post-Global Financial Crisis (GFC) period was a “stress test” that indicated the ability of Australian households to cope well with adverse economic developments. Some of the commentary on Australian house prices, especially from offshore based groups, argues that there is a housing price “bubble” in Australia which will eventually burst and replicate the downward path of US and UK house prices through the 2008 to 2011 post-GFC period. In our view, the US and UK housing market outcomes reflected the severe recessions and the housing demand/supply imbalances that hit the two economies after the GFC. Fortunately, through good luck and good management, Australia did not have a recession and the most important influence on the housing market’s outcomes, the unemployment rate, peaked at just under 6%. That was significantly below the peaks reached in the US and UK where the rates are moving lower but are still around 8%.

Michael Workman Senior Economist T. +612 9118 1019 E. michael.workman@cba.com.au Diana Mousina Economist T. +612 9118 6394 E. diana.mousina@cba.com.au
Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

Global Markets Research | Economics: Issues

HOUSEHOLD LIABILITIES

Household Balance Sheets Some commentary has Some commentary on Australian balance sheet trends concludes that Australian household Australian household debt levels as too high. debt levels are too high and that there has been unsustainable growth in debt positions. Following that line of argument, households may not be well placed to deal with negative economic shocks like job loss. Some debt to income ratios are relatively high . The survey evidence does not show undue vulnerability. At first glance, some debt ratios indicate that households are sitting on relatively large liabilities. The average debt-to-disposable (or after tax) income ratio, for example, is at 147%, a 28% increase on ten years ago. And, Australian liabilities (as a % of disposable or after-tax income) are significantly above our global peers. But global debt comparisons may be unreliable because of the difficulty in sourcing comparable data on the level of house prices across countries. Another offsetting issue is the often neglected asset side of the household balance sheet. Looking at the Australian debt-to-assets ratio paints a much stronger picture of overall household financial positions. The average debt-to-assets ratio sits at a respectable, and relatively low, 17.6%. Debt often has negative connotations attached to it. But, it can often be used for a valuable purpose. If borrowing is being used to fund investment, for example, then there could be a productivity gain. It’s also important to consider who holds the debt. The debt may be held by high-income households, using the tax effective provisions like negative gearing, to fund property and share portfolio investments. HILDA Data

% 190

(% of disposable income)
Australia Japan US

% 190

143

143

UK 95

France 95 Italy

48

NZ

48

Source: OECD/RBNZ/RBA

0 1988 1991 1994 1997 2000 2003 2006 2009 2012

0

H/HOLD SAVINGS & DEBTS
%

(% of disposable income)

%

12 Housing debt servicing

12

8

8

4

H'hold savings ratio

4

0 ABS & CBA -4 Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
% 160 Debt-todisposable income ratio (lhs) 120 Debt-toassets ratio (rhs) 80

0

-4

Debt can often be used for valuable and productive purposes e.g. borrowing to fund investment.

AUST HOUSEHOLD DEBT

% 20

16

12

We are able to analyse trends in household We can analyse debt positions using the HILDA data changes in debt (Household, Income and Labour Dynamics in positions using the Australia). The study takes a sample of HILDA (Household, Australian households occupying private Income and Labour Dynamics in Australia). dwellings across 2002-2010. The HILDA report looks at the distribution of debt across each household (but not by individuals). Growth in debt levels The number of households holding debt has increased marginally. According to the HILDA data, the proportion of households holding debt has increased marginally over 2002-2010. In 2010, around 69% of households held some debt (compared to 65% in 2002). So just under a third of Australian households are living debt-free. The level of debt that households are carrying has also increased. The mean debt level of households is around $151,488. But, the median level of debt is much lower at $20,081.

Source: RBA 40 Sep-1988 Sep-1996 Sep-2004 8 Sep-2012

DEBT ACROSS HOUSEHOLDS
'000's 160 Source: HILDA 2013 Mean ($) 120 120 '000's 160

80

80

40 Median ($) 0 2002 2006 2010

40

But there has been quite a large increase in debt levels.

0

2

Global Markets Research | Economics: Issues

The mean level of debt is skewed upwards because there are a small number of (high income) households in the sample that hold relatively high debt levels. Nevertheless, growth in both the mean and median levels of debt over 2002-2010 has been significant. It is important to consider where the growth in Which areas of debt have grown the most? debt has occurred. Has it occurred in typically “problem” areas like credit card debt? Or has it occurred in areas like housing or other property debt that have a corresponding asset attachment?

%
30

RBA CREDIT AGGREGATES
(annual % change)

%
30

Business credit
20 20

10

Housing credit Personal credit

10

0

0

Total
-10 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 -10

COMPOSITION OF DEBT AMONGST HOUSEHOLDS WITH DEBT
(share of each type of debt, by level of debt, %, 2010)
80 Source: HILDA 2013

60

Other Debt 40 Credit Card Debt 20 Other Property Debt 0 Bottom quintile 2nd quintile 3rd quintile 4th quintile Top quintile HECS Debt Home Debt Business Debt

Credit card debt is declining as a proportion of total debt and is only significant for the bottom two debt quintiles.

Credit card debt is often seen to be quite a persistent component of the Australian debt landscape. But, according to the HILDA data, credit card debt is only important for the bottom debt quintile (those households with the lowest debt levels). For these households, credit card debt made up around a third of total debt outstanding in 2010. This proportion may seem large but in value terms it only equates to around $1,000. For other debt quintiles, credit card debt is small (under 11% of total debt) and has been declining as a proportion of total debt. Higher income groups tend to prefer lower cost debt, like re-drawable mortgages. Credit card activity is currently subdued, with average credit card balances declining and slow growth in credit card cash advances. As a result, growth in credit card debt is likely to remain weak over the near-term. Housing debt, on average, is the largest source of household debt. And the value of this debt tends to be large. In 2010, the top debt quintile held around $355K in housing debt. Debt on other (e.g. investment) property is also increasing in significance. In 2010, other property debt made up 29% of debt for the top

%pa 12

CREDIT CARD ACTIVITY
(%pa, smthd)

%pa 12

Source: RBA

8 Balances

8

4

4

0

Total Accounts Avge balance per card

0

Future growth in credit card debt is likely to be subdued.

-4
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

-4

CREDIT CARD CASH ADVANCES
% 24

(annual % change*)

% 24

12

12

Housing debt is the largest source of household debt. Other property debt is increasing in significance.

0

0

-12

-12

*smoothed

-24 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

-24

3

Global Markets Research | Economics: Issues

quintile. In 2002 it made up a smaller 23%.
%

HOUSEHOLD INDEBTEDNESS
(median)
Source: HILDA 2013

% 10

The majority of the increase in household debt over 2002-2010 was growth in housing loans.

So it is fair to conclude that most of the households who hold the most debt (in value terms) hold a residential property. From this conclusion we can assume that the majority of the increase in household debt over 2002-2010 was growth in housing loans. Is the growth in household debt positions a problem? To answer this question we need to determine how many households have debt levels that may become difficult to service. Levels of indebtedness

34

31 Household debt: Household assets (rhs) 27 Household debt: Household income (lhs) 24

9

8

7

20 2002 2006 2010

6

There has been little change in the household debt-toassets ratio.

Household indebtedness can be determined through examining household debt ratios. In the HILDA survey, the median level of household debt made up 9% of assets in 2010. This was unchanged on the 2006 level and only marginally higher than in 2002. There was also little change in households with “excessive” debt-to-assets ratio (above 0.75 or 1). Therefore, the debt-to-assets ratio indicates that there has been little change in household indebtedness. The household debt-to-income ratio indicates the ability of households to service debt. Using this ratio, household indebtedness looks to have increased more significantly. In 2010, the household debt to income ratio was 33%, from 22% in 2002. More significantly, there has been significant growth in households with “excessive” debt-to-income ratios. Excessive debt is defined by a debt-to-assets ratio that is greater than 0.75 and a debt-to-income ratio greater than 4. In 2002, around 8% of households had a high debt-to-income ratio (above 4). This increased to 13.1% in 2010. And 6.2% of households had a debt-to-income ratio above 6 in 2010 which was an increase from 4% in 2002. There is some evidence that the levels of households with “dangerous” debt levels has increased. Examining the characteristics of households with these high debt levels is also important to determine the ease with which the debt is serviced. Characteristics of debt holders

% 14

EXCESSIVE DEBT-TO-INCOME
(% with high ratio, median)
Source: HILDA 2013

%

11 >4

7 >6

4

Lift in the debt-toincome ratio.

0 2002 2006 2010

% 8

EXCESSIVE DEBT-TO-ASSETS
(% with high ratio, median)
Source: HILDA 2013 >0.75

%

6

>1 4

2

0 2002 2006 2010

AUST H/H ASSETS BY RISK
% 75

(% of total)

% 75

Fairly safe

50

50

The persistent and excessive debt group.

The most concerning debt holdings are those that are persistent and excessive. The HILDA data analyses the characteristics of households that have both persistent and excessive levels of debt. Based on the HILDA study, a couple household (with or without dependent children) are the most likely to have an excessive debt-toincome ratio compared to a single household.

Safe 25 25

Fairly risky 0

Source: CBA (e)

0 1989 1992 1995 1998 2001 2004 2007 2010

4

Global Markets Research | Economics: Issues

But, a couple household are also more likely to have a larger pool of assets, relative to their debt. And the debt-toassets ratio tends to decline with age. A household’s debt-to-assets ratio tends to decline with age. The probability of a high debt-to-income ratio peaks in the 35-44 age category and then declines. This occurs because the majority of household debt is held on the family home and as you move through age brackets, the equity in the family home increases as debt is repaid. The healthiness of a household tends to be positively associated with a higher debt-toincome ratio. Similarly for educational attainment. Therefore, a higher degree of education tends to be associated with a higher debt-to-income ratio. The conclusion from these characteristics is that households that are typically associated with better economic outcomes (e.g. better health, higher educational attainment, prime age, couple household) are all often associated with higher indebtedness (higher debt-toincome ratios). Households’ ability to service debt. From this data we can conclude that households that are better able to cope with higher debt levels are the ones taking it on. As well, high debt is often matched by high levels of assets. This would mean that a sudden loss of income would require (at worst) a household to sell down their assets. On average, it would therefore appear that households are in a good position to deal with high levels of debt. APRA and RBA data confirms this view with recent arrears trends suggesting limited stress in an aggregate sense. Housing-related debt Housing debt plays a large part in the debt landscape. The majority of the growth in household debt over 2002-2010 was due to increasing housingrelated debt. Owner-occupied debt was $867bn in March 2013, about twice as much as investor-related debt of $413bn. It is important to consider the relative importance of housing to other forms of debt and whether households are in the position to finance the typical housing loan. The answer depends on income and asset positions. Housing ratios, such as the housing debt to disposable income are at historically high levels (see facing chart) which indicate that the housing debt burden is large. But it has stabilised over the past 5 years as the household savings ratio moved to the 10% level, the highest since the 1980s. Taking a closer look at repayment trends we find that households appear to be in control of

% 35

AUSTRALIAN HOUSING DEBT
Housing debt-todisposable income ratio (lhs)

% 150

26 Housing debt-tohousing assets ratio (rhs) 18

113

75

9

38

Household characteristics.

Source: RBA 0 Sep-1988 Sep-1996 Sep-2004 0 Sep-2012

PRINCIPAL REPAYMENTS
$bn

(cumulative overpayment)

$bn

30

30

20

20

10

10

0 Sep-97

Dec-02

Mar-08

0 Jun-13

*assumes prinipal repayment ratio fixed at 1995-98 level

REPAYMENT RATES
% 15
Annual change in customers repaying above required rate (lhs) Change in mortgage rate (inverse, rhs)

% -4.0

10

-3.0

5

-2.0

0

-1.0

-5

0.0

-10

1.0

-15 Jan-05

2.0 Jan-08 Jan-11

$bn 1400

HOUSING DEBT STOCK
(quarterly, outstanding)

$bn 1400

1200 Investor 1000

1200

1000

800

800

600 Owneroccupied

600

400

400

200 Sep-99

200 Sep-02 Sep-05 Sep-08 Sep-11

5

Global Markets Research | Economics: Issues

these relatively large debt positions. They have taken advantage of lower interest rates to prepay debt, reducing the average term of mortgages and lifting their net equity positions. Home ownership rates Home ownership rates falling. One indicator of a shift in the willingness, or financial ability, to take on any or more housingrelated debt is home ownership rates. The HILDA survey indicates that there has been a downward shift, from 2001 to 2010, in the proportion of households that are in owneroccupied dwellings. If the current trend to household savings ratios of around 10% is maintained in the next few years then it is possible that ownership rates could continue their gradual slide. It means that more households, as in Europe, would prefer long term renting to ownership. It could also mean investor-related lending takes a gradually larger proportion of total housing debt. Typically, about two thirds of households in the States and Territories are owner-occupiers. But, from the HILDA survey, the downward shift seen in national home ownership rates shift is not uniform across the States. Small rises occurred in Qld, WA and the ACT but were offset by falls in NSW, Vic, SA, Tas and NT. Home values and net equity Negative equity trending higher. The value of a house to a household’s net wealth position needs to be judged against the amount of housing debt. The HILDA survey gives a measure of the mean home equity from 2001 to 2010, showing a significant rise over the period. It is in line with the rise in home values over the same period. The survey also gives some details on the percentage of households facing negative equity positions (where debt is larger than house value) over the period. It has also been rising, from just under 2% to over 2.5%. The measure displays some volatility through the survey period. So, even though house prices rose there is a consistent trend upwards in negative equity. The rate of home ownership increases with age, which is what should be expected. Mainly because incomes increase with age and dual income partnerships rise sharply from the late teens to the late twenties. But the interesting shift is the significant decline in ownership rates by the middle aged groups who have been in the past the major “change-up” buyers. Reluctance to take on more housing debt, possibly because of job uncertainty, could be the factors causing the shift. It means relatively slower housing credit growth in the future if it continues.

% 70

HOME OWNERSHIP RATES
(2001 to 2010)
Proportion of households that are owner-occupied

% 70

68

68

66

66

64

Proportion of people who own their own home*

64

62 Source: HILDA 60 2001 2003 2005 2007 2009 *People aged 18 or over

62

60

% 8 6 4 2 0 -2 -4 -6

OWNER -OCCUPIED HOUSEHOLDS
(Mean rate %, 2001 to 2010)

% 80

Home ownership rates, rhs

70

60

Change in rate, 2001 to 2010, lhs Source: HILDA

50

-8 NSW VIC QLD SA WA TAS NT ACT

40

HOME OWNER EQUITY
% 4.0

(home value minus home debt)

2010 $000s 450

3.0

Mean home equity $000s, rhs

400

2.0 % with negative equity, lhs

350

1.0

300

Source: HILDA 0.0 2001 2004 2007 2010 250

% 10 8 6 4 2 0 -2 -4 -6 -8 -10

HOME OWNERSHIP RATES
(by age group, 2001 to 2010)
Mean home ownership rates, rhs

% 100

Home ownership rates rise with age.

80

60

40

Change in rate, 2001 to 2010, lhs Source: HILDA 18-24 25-24 35-44 45-54 55-64 65 & over

20

0

6

Global Markets Research | Economics: Issues

International house prices International house prices diverging. Housing is generally the major asset of households. In Australia, for instance, the value of the house in 2010 was around 45% of total household assets. So trends in housing prices have significant bearings on relative financial positions of households across economies. According to OECD data, Australian house prices were around 40% higher in 2012 than they were in 2004. Higher housing prices means the asset position of households here has improved. In comparison, the US and UK housing price outcomes through and after the GFC have been relatively poor. The UK’s house prices are 20% higher than 2004 but have been essentially been flat since 2007. In comparison US house prices are back to their 2004 levels and about 20% below the pre-GFC levels. Note that the commodity exporting economies of Norway, Canada, New Zealand and Australia have fared better, in terms of housing prices, than the US and the UK since the GFC. International unemployment rates
100

HOUSE PRICES
(Nominal, 2004=100)
180 170 160 150 Australia 140 130 120 110 100 OECD 90 04 05 06 07 08 09 10 11 12 US UK New Zealand Norway Canada

REAL HOUSE PRICES
(2004=100)
160 150 140 130 120 110 Germany Australia Canada Norway

Unemployment rates are a major influence on housing issues.

One of the biggest threats to a stable housing market and household asset outcomes, is job loss and higher unemployment rates. It usually results in forced property sales which reduce prices. The GFC caused severe economic recessions in the US and the EU. Unemployment rates rose to their highest levels since the early 1990s recession. The GFC recession was driven by a major global credit squeeze. The outcomes of the two recessions were similar - unemployment rate rose dramatically, except in those countries that avoided recession, like Australia. Importantly, it helps explain why Australia’s house prices are still relatively high compared to the US and UK. Conclusions

90 OECD 80 04 05 06 07 08 09 10 11 US

UK

12

% 12

UNEMPLOYMENT RATE
Euro zone United States

% 12

8 UK Australia

8

4 Japan

4

Source: CEIC

Conclusions.

Survey data indicates that household debt levels in Australia are relatively high by international standards. But, it also shows that most indebted Australian households are well placed to service it with a reasonable buffer to negative economic shocks, like higher unemployment rates. The evidence indicates that most of the housing-related debt is held by the higher income households, who can more easily service it. Home ownership rates in Australia have declined gradually over the past decade as household savings have risen and households have become slightly more adverse to higher debt levels. It points to continued modest growth in housing credit.

0 Jan 05
Index 115

0 Jan 07 Jan 09 Jan 11 Jan 13
Index 115

REAL GDP
(Sep'08= 100)
Australia

110 Lehman collapse 105 NZ

110

US

105

100 UK 95 Japan Europe

100

95

90 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

90

7

Global Markets Research | Economics: Issues

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8

Global Markets Research | Economics: Issues

Research
Commodities Luke Mathews Lachlan Shaw Vivek Dhar Agri Commodities Mining & Energy Commodities Mining & Energy Commodities Telephone +612 9118 1098 +613 9675 8618 +613 9675 6183 Email Address luke.mathews@cba.com.au lachlan.shaw@cba.com.au vivek.dhar@cba.com.au

Economics Michael Blythe Michael Workman John Peters Gareth Aird Diana Mousina Chief Economist Senior Economist Senior Economist Economist Economist

Telephone +612 9118 1101 +612 9118 1019 +612 9117 0112 +612 9118 1100 +612 9118 6394

Email Address michael.blythe@cba.com.au michael.workman@cba.com.au john.peters@cba.com.au gareth.aird@cba.com.au diana.mousina@cba.com.au

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