Social Trends – Page 123 – Digital Finance Analytics (DFA) Blog

How have your family’s fortunes changed?

Do you feel that, overall, you’re “better off” than you were in the past? Or that things are getting worse, or have plateaued?

We now have the data to get us a pretty good answer to that question, right down to the detail by “family types”, as categorised by the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Starting in 2001, this longitudinal survey now tracks more than 17,500 people in 9,500 households.

The interactive below lets you drag and drop your family members into the house to see what the HILDA data reveal.

One measure we’re showing is what economists call “equivalised income”. That’s different to your total household income; here’s how the HILDA report explains it:

Overall, median equivalised incomes have gone up since 2001 for all family types, but some have fared better than others, as this chart from the full HILDA report shows:

For the purposes of interpreting the HILDA data, you might need to be a bit flexible when deciding which “family type” applies to you. For example, a household with two single, adult sisters living together will be classified as two single-person “families”, even though they might see themselves as a family unit.

And it’s worth remembering, as the HILDA report notes:

… some households will contain multiple “families”. For example, a household containing a non-elderly couple living with a non-dependent son will contain a non-elderly couple family and a non-elderly single male. Both of these families will, of course, have the same household equivalised income. Also note that, to be classified as having dependent children, the children must live with the parent or guardian at least 50% of the time. Consequently, individuals with dependent children who reside with them less than 50% of the time will not be classified as having resident dependent children.

Household Financial Pressure Tightens Some More

Digital Finance Analytics (DFA) has released the July 2018 mortgage stress and default analysis update. The latest RBA data on household debt to income to March reached a new high of 190.1[1], and CBA today said in their results announcement ”there has been an uptick in home loan arrears as some households experienced difficulties with rising essential costs and limited income growth, leading to some pockets of stress”.

So no surprise to see mortgage stress continuing to rise. Across Australia, more than 990,000 households are estimated to be now in mortgage stress (last month 970,000). This equates to 30.4% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 57,900 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.7 basis points, though losses in WA are higher at 5.1 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.

Martin North, Principal of Digital Finance Analytics says “households remain under pressure, with many coping with very large mortgages against stretched incomes, reflecting the over generous lending standards which existed until recently. Some who are less stretched are able to refinance to cut their monthly repayments, but we find that the more stretched households are locked in to existing higher rate loans”.

“Given that lending for housing continues to rise at more than 6% on an annualised basis, household pressure is still set to get more intense. In addition, prices are falling in some post codes, and the threat of negative equity is now rearing its ugly head”.

“The caustic formula of coping with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, and now prices are slipping. While mortgage interest rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises. Many are dipping into savings to support their finances.”

Recent easing interest rate pressures on the banks has decreased the need for them to lift rates higher by reference to the Bank Bill Swap Rates (BBSW), despite the fact that a number of smaller players have done so already.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end June 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes. Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected.

The outlined data and analysis on mortgage stress does not occur in a vacuum. The revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission) have highlighted deep issues in the regulatory environment that have contributed to the household debt “stress bomb”. However, most of the media commentary on the regulatory framework has been superficial or poorly informed. For example, several commentators have strongly criticised the Australian Securities and Investments Commission (ASIC) for not doing enough but have failed to explain what ASIC has in fact done, and what it ought to have done.

The Commission has highlighted major concerns regarding the law and practice of responsible lending. North has published widely on responsible lending law, standards and practices over the last 3-4 years, and continues to do so. Her latest work (which is co-authored with Therese Wilson from Griffith University) outlines and critiques the responsible lending actions taken ASIC from the beginning of 2014 until the end of June 2017. This paper was published by the Federal Law Review, a top ranked law journal, this month. A draft version of the paper can be downloaded at https://ssrn.com/author=905894.

The responsible lending study by North and Wilson found that ASIC proactively engaged with lenders, encouraged tighter lending standards, and sought or imposed severe penalties for egregious conduct. Further, ASIC strategically targeted credit products commonly acknowledged as the riskiest or most material from a borrower’s perspective, such as small amount credit contracts (commonly referred to as payday loans), interest only home loans, and car loans. North suggests “ASIC deserves commendation for these efforts but could (and should) have done more given the very high levels of household debt. The area of lending of most concern, and that ASIC should have targeted more robustly and systematically, is home mortgages (including investment and owner occupier loans).”

Reported concerns regarding actions taken by the other major regulator of the finance sector, the Australian Prudential Regulation Authority (APRA), have been muted so far. However, an upcoming paper by North and Wilson suggests APRA (rather than ASIC) should be the primary focus of regulatory criticism. This paper concludes that “APRA failed to reasonably prevent or constrain the accumulation of major systemic risks across the financial system and its regulatory approach was light touch at best.”

Stress by The Numbers.

Regional analysis shows that NSW has 267,298 households in stress (264,737 last month), VIC 279,207 (266,958 last month), QLD 174,137 (172,088 last month) and WA has 132,035 (129,741 last month). The probability of default over the next 12 months rose, with around 11,000 in WA, around 10,500 in QLD, 14,500 in VIC and 15,300 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($943 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.7 basis points respectively. Losses are likely to be highest in WA at 5.1 basis points, which equates to $744 million from Owner Occupied borrowers.

Top Post Codes By Stressed Households

[1] RBA E2 Household Finances – Selected Ratios March 2018

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Households dipping into savings to pay for basics: ME Bank

An increasing number of Australians are struggling with the cost of living, dipping into their short-term savings just to get by, ME Bank’s latest Household Financial Comfort Report says, via The New Daily.

The biannual survey released Monday asked 1500 people to rate their household comfort for the first half of 2018, showing short-term cash savings to be the biggest area of decline.

A bright spot in the otherwise gloomy findings came for renters, who reported a lessening in financial stress, thanks largely to a cooling housing market and falling rents.

The report’s Household Financial Comfort Index, which surveys how ordinary Australian perceive their own financial wellbeing, saw a 3 per cent drop on the February results to 4.93 out of 10 for the first half of 2018 – “its lowest level in a couple of years”.

Living expenses were the biggest reason for using short-term savings, the survey found.

In the past year, 17 per cent of households could not always pay their utilities bills on time, 19 per cent sought financial help from family or friends and 15 per cent pawned or sold something to buy necessities, the findings showed.

“Australians generally can dip into their savings to get by,” consulting economist for ME Jeff Oughton said.

“However some households may get to a point where there’s no more savings to draw from,” Mr Oughton said.

“Currently, around a quarter of Australian households have less than $1000 in cash savings,” he added.

The report said the worst-affected demographic was young singles and couples under 30 with no kids.

This group reported falls across all areas of comfort, including in their ability to handle a financial emergency.

Meanwhile, ‘baby boomers’ continued to report the highest financial comfort of all generations.

The report revealed housing stress was still broadly unchanged for households with mortgages.

Some 45 per cent of mortgage holders reported to they contributed more than 30 per cent of their disposable income toward their home loans the past six months.

“The good news for renters is that financial stress has lessened somewhat during the past six months, thanks to the housing market cooling and rents falling,” Mr Oughton said.

“While almost three-quarters (72 per cent) of renters were previously contributing over 30 per cent of their disposable income towards rent, this number dropped significantly to two-thirds (67 per cent in the most recent survey,” he added.

Number of Australians becoming homeowners plummets: HILDA survey

From The Real Estate Conversation

Renters are quickly becoming a growing demographic in Australia, as fresh research reveals the proportion of Australian renters becoming homeowners has nosedived.

In news that will hardly come as a surprise to most millennials, the number of Australian renters eventually becoming homeowners has plummeted over the last 15 years – particularly for those between the ages of 18 and 24.

The latest Household, Income and Labour Dynamics in Australia (HILDA) survey found the overall proportion of people living in rental accomodation has increased by 23 per cent since 2001 to 31.3 per cent in 2016.

Undoubtedly as a result of this, the survey correspondingly found people aged between 15 and 24 are choosing to live with their parents longer.

Melbourne Institute deputy director and report co-author Roger Wilkins told WLLIAMS MEDIA the findings from the survey highlights the plight of renters.

“Renters, particularly younger ones, are finding it increasingly harder to achieve home ownership,” Wilkins said.

According to the HILDA survey, renters were far more likely to be under housing or financial stress than homeowners.

Source: HILDA Survey

Findings from the survey show renting has declined since 2011 for the 25 to 34 age group.

“But this is not because they are more likely to be home owners, however. Rather, as with the trend for the 15 to 24 age group, it reflects the trend towards remaining in the parental home, which is often owner-occupied, until older ages,” the report said.

Over the survey period, which began in 2001 and tracks over 17,500 people across 9,500 households, the number of renters aged between 18 and 24 transitioning into home ownership has dropped massively, from 13.5 per cent down to just 7.5 per cent.

The declining rates of home ownership demonstrate the growing evidence of ‘intergenerational inequality’.

Source: HILDA survey

“There has been a growth in inequality across the generations, and this is very much tied to home ownership,” Wilkins said.

Despite this, research from Westpac shows more millennials than ever are saving up for their first property.

The data, released earlier this year, shows the highest number of first home buyer loans in March and April 2018, compared to the same period in the previous two years.

Kathryn Carpenter, Westpac’s Head of Savings, told WILLIAMS MEDIA that first home buyers are being diligent with their savings and digging deep to save for a home.

Related reading: Advice for first home buyers after new research shows most are clueless about buying property: ME Bank

“Millennials are often depicted as a generation more focused on life experiences and living in the ‘now’. However, our research shows that many are in fact taking saving for a home deposit seriously and prioritising it above other goals including travel or lifestyle,” Carpenter said.

“It is great to see our millennial customers making the most of their savings plans, and the timing could not be better with the current cooling of the property market.”

Source: HILDA survey

The research also revealed the younger end of the millennial spectrum (18-24) are already starting to save for a home.

“Our data shows reaching 25 appears to be a key tipping point for customers moving from thinking about saving for a home, to seriously saving for one”, commented Carpenter.

Dion Tolley, a real estate agent from Place Bulimba, told WILLIAMS MEDIA he has started to see more first home buyers entering the market.

“The investor market has pretty much left in the last year, given the investor squeeze from the banks, and the pressure they are putting on with lending requirements. Also with the changes to stamp duty concession at $499,000, we are definitely seeing more first home buyers entering the market along with those interest rates. As the concession has been extended for 12 months, more first home buyers are moving into the market instead of renting,” Tolley said.

“I think most people are sick of paying off investors mortgages and want to own their own homes.

“Most first home buyers typically purchase between the $350,000 to $499,000 threshold, and will typically go for the two-bedroom, two-bathroom, one car apartments. Established properties are more consistently snapped up than off the plan apartments.

“It has usually taken most of my clients who are first home buyers a couple of years to save up a decent deposit. Their parents will use the equity from their own home to tip them over that 20 per cent threshold to avoid lenders mortgage insurance because that does add on a fair whack to the weekly mortgage repayments,” he said.

Homeowners face refi challenges as home values fall

From Australian Broker

As many as 15% of surveyed homeowners have faced challenges when trying to refinance, due to falling property prices.

Research conducted by mortgage lender State Custodians, quizzed 1,022 home owners on their ability to refinance in the current climate, as national average home values continues to fall.

According to CoreLogic market data for the month of July, capital city home prices declined by 0.6% and now stand 2.4% lower over the year; it is the largest monthly decline in six and a half years. The national home price index also declined by 0.6% to average a 1.6% decline over the year.

The figures published by State Custodians also revealed that young people were the most affected, with around 34% of those under the age of 34 saying they’ve been unsuccessful in re-financing because of declining property values.

“Property prices have been stagnating and falling across much of Australia for some time now – especially in the major capital markets of Sydney and Melbourne – which has made refinancing tougher for some,” State Custodian general manager Joanna Pretty said in a statement.

“Anyone who has not yet built up a substantial amount of equity in property or whose property has fallen in value is more likely to be unsuccessful in seeking refinancing,” she added.

However, there is some good news as 29% of respondents said they are confident their property’s value has improved since purchase. Further, 41% of people with mortgages have successfully refinanced their home and experienced no problem getting a better rate as their property’s value increased.

Pretty said that when refinancing, homeowners and investors are often overly confident that their property increased in value.

“Declines in property value are influenced by what is happening in the market and the land value of the area,” she said. She explained that valuation of homes even in good areas can still come back below expectation due to poor property maintenance and upkeep.

Pretty suggested that “it may also be helpful to be present when a valuer visits to point out improvements that may not be immediately apparent, such as solar panels.”

Elsewhere, AB says brokers can help the thousands of people labelled ‘mortgage prisoners’ by directing them to non-bank lenders, is the call from an industry association.

Mortgage prisoners are borrowers unable to refinance to a lower interest rate due to changed lending criteria by the banks.

The Finance Brokers Association of Australia (FBAA) has said that going to non-banks is the way to overcome this.

FBAA executive director Peter White said the government should also step in and push banks to be realistic with their modelling.

He revealed he personally brought up the issue with federal treasurer Scott Morrison when the two caught up at a recent lunch.

White said banks have recently increased the interest rate ‘buffer’ they add onto a loan to ensure the borrower has capacity to pay if rates rise, but the extent of the increase has led to a situation where borrowers who are already paying a mortgage are being rejected for loans that actually reduce their repayments.

He said, “It’s madness. Someone wants to refinance to pay a lower rate yet the bank adds an extra 4% to the interest rate and decides the borrower can’t afford to pay less.”

He said while he understands the need for a lender to add a safety net to the prevailing interest rate, they are now effectively doubling the rate to a level where the borrower can’t meet the new lending criteria.

He added, “This doesn’t affect the wealthy, it affects those who can least afford it and it has almost stalled the home loan refinance market.”

The assessment change is a knee-jerk reaction by the banks to recent inquiries and the royal commission, according to White, who predicts the banks may start to set an even higher rate.

He said the situation only reinforces the value of the expert advice that finance brokers provide and has urged brokers to be proactive in the space.

He said, “Many Australians are not even aware of non-bank lenders, let alone the difference or that they are not under some of the same regulatory oversight, so we must educate and help them. We know the banks won’t!”

Changing demographics to alter dwelling demand

From The Adviser

As Generation Y begins to enter the housing market, there could be a change in the types of dwellings sought after, a new report has suggested.

According to industry analyst and economic forecasters BIS Oxford Economics, changes to the age profile of the population over the next decade will likely result in a shift in the type of demand for dwellings, as Generation Y – those currently aged around 20 to 34 years old – begin to have their own families and move onto the property ladder.

According to BIS’s Emerging Trends in Residential Market Demand report, which examines trends revealed by a detailed analysis of Census data from the past 25 years, there will be “solid demand for units and apartments over the next decade” driven by an overall increase in “the propensity to be living in higher density dwellings across all age groups”.

The report outlines that while there will be continued demand for units and apartments over the next decade, the growth in demand will eventually slow.

Senior manager for residential property at BIS Oxford Economics, Angie Zigomanis, has suggested that, over the past 15 years, there has been rapid population growth among 20-to 34-year olds, as well as strong net overseas migration inflows, which have helped support the boom in apartment construction in the past decade by supplying a steady stream of new tenants to the market.

Mr Zigomanis also noted that there is evidence that people are staying in apartments and townhouses longer.

The analyst highlighted that, in Sydney, more than half (53 per cent) of households aged 35-to 39-years old, and nearly half (49 per cent) of households with children at a pre-school age, now live in these smaller dwellings.

While households have typically favoured townhouses over apartments, in Sydney and Melbourne, there has been an acceleration in the take-up of apartments by both groups since the 2011 Census. The trend has also been similar, although less pronounced in Brisbane, Adelaide and Perth, the report added.

Looking to the future, BIS notes that rising demand for smaller dwellings by Generation Y over the next decade would be apparent across all capital cities, although will be most pronounced in Sydney, and to a lesser extent Melbourne, where separate houses are least affordable.

In Brisbane, Adelaide and Perth, it argued, householders would be much more likely to be in a detached house once they enter their late 30s and 40s, and strong demand for new separate houses is therefore likely to continue.

However, BIS argues that it is likely that rising house prices and decreasing housing affordability in the most desirable locations in the capital cities are causing “an increasing trade-off” for some couples and family buyers between price, size of dwelling, and location, with many seeking smaller and more affordable dwellings to remain close to their desired location.

The analysts argued that, should this trade-off activity increase as Generation Y gets older, then this provides an opportunity for developers in all capital cities to meet this demand, especially given the fact that the boom in multi-unit dwelling construction has up until now been investment-driven “with design being geared toward Generation Y renters living as singles, couples without children, and in share households,” BIS said.

“To meet the potential growing number of Generation Y families in established areas, multi-unit dwellings will need to be designed to be more appropriate to family life, offering more space, both indoor and some outdoor, or located adjacent to public outdoor spaces,” said Mr Zigomanis.

“In particular, new apartment designs will need to change to provide more appropriate product for Generation Y families.”

However, should Generation Y follow the trend of the previous generations and eschew renting for owning their own, larger dwellings as they age, then this would “support a decade-long boom in demand for new houses and land in the new housing estates on the outskirts of Australia’s major cities and affordable major regional centres,” said Mr Zigomanis.

“Pressure is also likely to be maintained on house prices in established areas, as competition remains strong for Generation Y families looking to remain in the established areas where they have already been living and renting in smaller apartments,” he said.

ACCC win puts debt collectors on notice

The ACCC says that the Federal Court has found one of Australia’s largest debt collection firms, ACM Group Ltd, engaged in misleading or deceptive conduct, harassment and coercion, and unconscionable conduct in its dealings with two vulnerable consumers.

ACM’s conduct was found to be in contravention of the Australian Consumer Law.

The ACCC brought the action against ACM in respect of its conduct between 2011 and 2015 in pursuing two vulnerable customers who had defaulted on their phone bills. Their debts had been on-sold by their service provider to ACM for debt recovery.

“The ACCC and ASIC have done extensive work to improve debt collection practices,” ACCC Commissioner Sarah Court said.

“Lower-income groups suffer greater stress because of debt collection practices and have limited access to legal support, while creditors are using improper ways to escalate disputes.”

“This conduct by ACM was particularly egregious, as it included ongoing harassment of a care facility resident who had difficulty communicating after suffering multiple strokes, as well as a Centrelink recipient who was falsely told their credit would be affected for up to seven years if they failed to pay immediately,” Ms Court said.

“ACM was found to have made empty threats to litigate against both customers despite knowing they had no means, or only limited means, to repay.”

“One of the ACCC’s enduring enforcement priorities is taking action against conduct that impacts disadvantaged or vulnerable consumers,” Ms Court said.

In his judgment, Griffiths J rejected a number of explanations of why ACM had contacted one of the consumers 34 times and found that conduct amounted to undue harassment and coercion.

Griffiths J also found that the multiple telephone calls, coupled with the number and content of its correspondence was calculated to intimidate or demoralise the consumer.

Griffiths J stated that “ACM cannot justify its conduct on the basis that it required verification of information about [the] medical or financial circumstances when ACM itself did not take reasonable steps to contact people who may have been in a position to provide such verification”.

Background

The alleged conduct occurred between 2011–2015 in relation to one consumer, a resident in a care facility, and in September 2014 in relation to the other consumer, a single parent with a limited income. In each case, the debt being pursued had been sold to ACM Group by Telstra.

In 2012, in a case brought by ASIC, the Federal Court found that ACM Group had harassed and coerced consumers and engaged in ‘widespread’ and ‘systemic’ misleading and deceptive conduct when seeking to recover money.

In December 2013, the ACCC released ‘Dealing with debt collectors: Your rights and responsibilities’, a guide that helps consumers in trouble with debt understand their options and how to deal with debt collectors and creditors.

In July 2014, the ACCC and ASIC released updated guidelines for debt collection firms regarding their contact with consumers and compliance with the law. The guidelines encourage debt collectors to be flexible, fair and realistic and to recognise debtors who are vulnerable. The industry association for debt buyers, the Australian Collectors & Debt Buyers Association, required its members to accept these guidelines in March 2016.

In 2015, the ACCC released a report into the Australian debt collection industry.

Both the ACCC and ASIC are responsible for consumer protection in the debt collection industry. The two agencies work closely and in this case ASIC delegated its powers to the ACCC to pursue this action.

Why rents, not property prices, are best to assess housing supply and need-driven demand

From The Conversation.

If property prices are rising, it is commonly assumed we must be facing a shortage of supply relative to demand. So if we’re ever going to reduce housing affordability problems, we’re simply going to have to build our way out of it. After all, as anyone who’s sat in an introductory economics class would tell you, basic economics is sufficient to at least suggest that if prices are rising in the long term, then supply must be lagging behind demand.

It’s true the housing market is largely subject to the forces of supply and demand. The deficiency of this argument lies, not so much in any perceived cracks in the supply-demand framework taught in Economics 101, but in the fact that the appropriate “price” indicator is not property prices. It’s rent.

What’s the ‘price’ of housing?

The problem with relying on rising property prices as a “price” signal of a supply shortage is that the dwelling an owner-occupier buys is both a consumption and an investment good. It offers a place to live as well as an asset in which the owner invests a substantial part of their wealth. Hence, property prices are at best a murky indicator of the balance of supply and demand for housing as a home to live in and an asset to own.

It is well established in the housing economics literature that the “price” signal for the adequacy of supply relative to demand for housing services is rent. Rent reflects the cost of consuming housing or, to put it another way, the cost of living in a home. So if housing supply is lagging behind demand for housing as a place to live in, we should expect to see rents rise.

Are rents keeping pace with property prices?

Property prices have clearly surged over the long term in Australia, as the chart below shows.

The Residential Property Price Index (RPPI), adjusted for inflation and averaged across all capital cities, climbed by nearly 30% from 2008-18. Property prices in Sydney and Melbourne, where the real RPPI surged by 54% and 43% respectively, largely drove this average increase.

But housing economics principles tell us this can only be attributed to a supply shortage if rents have also soared.

It turns out real rents have remained relatively flat in most capital cities over the last decade. The chart below shows the real weekly rent of three-bedroom houses across all capital cities over the past decade. The weighted average has shifted upwards by a mere 10%, from $389 to $429.

For two-bedroom units, the average real weekly rent has also shifted slightly from $393 to $446. That’s a mild 13% increase over a decade.

The real rent increases have been relatively minor compared to the nearly 30% surge in real RPPI across all capital cities. There are again some differences between cities, but only Sydney had a noticeable increase in real rents. This still lagged behind the spike in real RPPI in the city.

Dealing with the crux of the affordability crisis

Overall, rent increases are clearly not keeping pace with soaring property prices in all major capital cities in Australia. So claims that a housing shortage is the principal cause of a lack of affordable housing are unfounded. Supply-side solutions, while important, will need to be targeted directly at low-income groups who find it difficult to compete in private rental markets to meet housing needs.

On the other hand, successive governments have offered preferential tax treatments of housing assets. These have encouraged a significant build-up of wealth in housing assets.

Some of these favourable tax advantages have undoubtedly been capitalised into rising property prices. That has made it harder and harder for renters to break into the home ownership market.

These are structural problems embedded within our tax policy settings. Hence, their impacts on house prices will not magically disappear any time soon unless policymakers are willing to undertake meaningful tax reform that shifts the emphasis away from treating housing as a commodity back to affordable housing as a fundamental right of all Australians.

Authors: Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University

The Two Sides Of The Household Debt Issue

Michael Pascoe has penned an article in the New Daily, which attempts to bring some balance to the discussion of the severity of household debt in Australia.

“there are no guarantees and household debt levels do indeed need watching, but it’s not as simple an Armageddon as the scaremongers would like you to think”.

Good on him, for not just following the herd on this one. Because the debt footprint is more complex than some would like to admit.

Averaging data tells us very little. For example the RBA chart showing 190 debt to income includes all households, including those without debt, so the ratio is higher for those with big debts.

Second, you have to look at individual households and their finances. This is of course what our surveys do, alongside details of their overall assets, and net worth.

And yes, many are doing just fine (even if much of those assets are in inflated housing, or superannuation which is locked away).

But it is the marginal borrower who is under the gun now, even at rock bottom interest rates, and banking lending standards are a lot tighter so around 40% of households are having trouble getting a refinance. Plus we do have problems with some interest only loans, especially where the borrower is a serial leveraged investor with a significant number of properties.

Then of course there is the question of whether employment rates will rise or fall, and the quality of new jobs on offer. As a piece in The Conversation today shows:

many jobs are Job creation in the female-dominated health and education service sectors is driving both full-time and part-time employment growth in Australia.

And some of these will be less well paid.

Here is a plot for all households of TOTAL debt repayments as a ratio to income at the current time. This includes households with a mortgage, those who own property outright and those renting. Many have no debt.

For those borrowing, debt can include mortgages (both owner occupied and investor), personal loans, credit cards, and other consumer finance. This does not include business lending.

Many more have commitments which require less than 20% of household incomes (from all sources). But others have much higher debt servicing requirements, and a few are through the 100% barrier – meaning ALL income is going to repay debt. Not pretty. In some cases this is triggered by changes in personal circumstances.

If you boil it back to owner occupied mortgage borrowers, then our data suggests around 30% have little wiggle room at current levels. Even small rises would be concerning.

And at the end of the day it will be the marginal borrower who has the potential to trigger issues down the track – as happened in the USA post the GFC.

It is certainly not an all or nothing picture. Granularity is your friend.