Household Finances – Page 33 – Digital Finance Analytics (DFA) Blog

RBA Financial Stability – Move Along, Nothing To See Here….

The latest 62 page edition of the RBA Financial Stability Review has been released, and it continues their line “of some risks, but no worries”. International economic conditions, and business confidence are, they say, on the improve while Australian household balance sheets and the housing market remain a core area of interest. The potential impact of rising rates and flat income are discussed, once again, but little new is added into the mix.

From a financial stability perspective, banks hold more capital, have tightened lending standards, and shadow banking is under control.

The key domestic risks in the Australian financial system continue to stem from household borrowing. Household indebtedness, most of which is mortgage borrowing, is high and gradually rising against a backdrop of low interest rates and weak income growth. While some households have taken advantage of low interest rates to make excess mortgage payments, others have increased their borrowing. Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending.

Prepayments are an important dynamic in the Australian mortgage market as they allow households to build a financial buffer to cushion mortgage rate rises or income falls. Aggregate mortgage buffers – balances in offset accounts and redraw facilities – remain around 17 per cent of outstanding loan balances, or over 2½ years of scheduled repayments at current interest rates.

These aggregates, however, mask substantial variation; about one-third of mortgages have less than one months’ buffer Not all of these are vulnerable given some borrowers have fixed rate mortgages that restrict prepayments, and some are investor mortgages where there are incentives to not pay down tax deductible debt. This leaves a smaller share of potentially vulnerable borrowers with new mortgages who have yet to accumulate prepayments, and borrowers who may not be able to afford prepayments. Partial data suggest that the share of households with only small buffers has declined in recent years, in part due to declines in mortgage rates. Households with small buffers also tend to be lower-income or lower-wealth households, which could make them more vulnerable to financial stress.

Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher. Steps taken by regulators in the past few years to strengthen the resilience of balance sheets, including limiting the pace of growth of investor lending, discouraging loans with high loan-to-valuation ratios (LVRs) and strengthening serviceability metrics, have seen the growth in riskier types of lending moderate. The most recent focus has been on limiting interest-only lending, and banks have responded by further reducing lending with high LVRs for interest-only loans, increasing interest rates for some types of mortgages and significantly reducing interest-only lending.

The tightening of banks’ lending standards for property loans is constraining some households and developers but, in doing so, making the balance sheets of both borrowers and lenders more resilient. Conditions are relatively weak in the Brisbane apartment market, with a large increase in supply reflected in declines in prices and rents. There are, however, few signs of significant settlement difficulties to date. More generally, while housing market conditions vary across the country, there are signs of easing of late, particularly in Sydney and Melbourne where conditions have been strongest.

With the tightening of lending standards, there is a potential that riskier lending migrates into the non-bank sector. To date, non-bank financial institutions’ residential mortgage lending has remained small though their lending for property development has picked up recently. While the banking system has minimal exposure to the non-bank financial sector, growth in finance outside the regulated sector is an area to watch.

Here are some of the other nuggets:

Very low interest rates have also contributed to strong growth in property prices internationally as investors search for yield. To the extent that prices have moved beyond what their underlying determinants suggest, this increases the risk of sharp price falls if interest rates were to rise suddenly or if risk sentiment were to deteriorate.

While household debt levels are high, and rising, to date the impact on households’ ability to service their debt has been muted by falls in interest rates to historically low levels. Nonetheless, highly indebted households are more likely to struggle to repay their debts, or substantially reduce their consumption, in response to a negative shock, such as a rise in unemployment, an unexpectedly large increase in interest rates or a sharp fall in housing prices.

The distribution of debt is also important in identifying where risks lie as typically it is not the ‘average’ household that gets into financial In Canada and Sweden, for example, the risks from high household debt may be heightened since the debt is concentrated among younger and low‑to-middle-income households, who are likely to be more vulnerable
to negative shocks.

Further, interest-only (IO) lending has been identified as increasing risks in some jurisdictions.4 Households with IO loans remain more indebted throughout the life of the loan than if they had been paying down the loan principal, making them more vulnerable to higher interest rates, reduced income, or lower housing prices. Such households are also more vulnerable to ‘payment shock’ due to the increase in repayments following the end of the interest-only period of the loan.

Global experience is that the culture within banks can have a major bearing on how a wide range of risks are identified and managed. There have been a number of examples where the absence of strong positive culture has given rise to a deterioration in asset performance, misconduct and loss of public trust. In Australia, there have also been examples of weak internal controls causing difficulties for some banks. These include in the areas of life insurance, wealth management and, more recently, retail banking. In August, AUSTRAC (the Australian Transaction Reports and Analysis Centre) initiated civil proceedings against the Commonwealth Bank of Australia for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. In the current environment where investors still expect high rates of return, despite regulatory and other changes that have reduced bank ROE, banks need to be careful of taking on more risk to boost returns.

A central element to address this issue is to ensure that banks build strong risk cultures and governance frameworks. Regulators have therefore heightened their focus on culture and the industry is taking steps to improve in this area.

Households Spending Less On Housing…But

Data from the ABS today – Housing Occupancy and Costs – highlights the average household with an owner occupied mortgage is paying around $450 a week, slightly lower than the peak a couple of years ago. This equates to around 16% of gross household income, on average.

This does not include repayments on investment properties of course (and many households have multiple properties as investing in property rises).

But of course, the true story is interest rates have fallen to all time lows, allowing people to borrow more, as prices rise. As a result, should interest rates start to bite, this will cause real pain. Then of course we have recent flat wage growth, in real terms, in the past couple of years.

Also, households have a bigger mortgage for longer, which is great for the banks, but not helpful from a household perspective, as it erodes savings into retirement and more older Australians are still borrowing. And of course the current high home prices show a paper profit, but that could be eroded if prices slide.

Thus, the ABS data should not be interpreted as everything is fine, it is not! In fact, underwriting standards should be much tighter now, as we highlighted this morning, Australian Banks are willing to go up to around 6 times income, higher than many other countries, with similar home price bubbles.

The proportion of income mortgagees are using for housing has declined over the last decade, according to new figures released today by the Australian Bureau of Statistics (ABS).

“In 2005-06, owners with a mortgage paid 19 per cent of their total household income on housing costs. By 2015-16 this had fallen to 16 per cent. This is likely driven by lower interest rates coupled with growth in household incomes over the last decade, ” Dean Adams, Director of Household Characteristics and Social Reporting, said.

In 2005-06, owners with a mortgage paid $434 per week in housing costs, similar to the $452 paid in 2015-16 in real terms. But over the same period, average total household incomes for mortgagees rose from $2,272 to $2,759 per week.

“Mortgage and property values have also increased in the last decade. Ten years ago, the real median mortgage value was $171,000 which rose to $230,000 in 2015-16. Meanwhile, the real median dwelling value increased from $449,000 to $520,000,” Mr Adams explained.

Going back another decade, the results also reveal that households are entering into a mortgage at older ages. The proportion of younger households (with a reference person aged under 35 years) represented 69 per cent of first home buyers in 1995-96 which dropped to 63 per cent by 2015-16.

“Having a mortgage is now the most common form of ownership for households whose reference person was aged between 35 and 54 years. Among this group, ownership with a mortgage increased by 15 percentage points over the last two decades, from 41 per cent to 56 per cent. Meanwhile, the rate of outright ownership in 2015-16 (12 per cent) was one-third the 1995-96 rate (36 per cent),” Mr Adams said.

The rate of older households (with a reference person aged 55 years and over) who were still paying off a mortgage has tripled between 1995-96 and 2015-16 (from 7 per cent to 21 per cent). Older households are spending more of their income on housing costs than two decades ago, increasing from 8 per cent to 14 per cent for those aged between 55 and 64, and from 5 per cent to 9 per cent for those aged 65 and over.

It’s ‘crunch time’ for Australian households

From Business Insider.

Australian households are in a vulnerable financial position, especially those who have taken out a mortgage. And in an era of weak incomes growth, soaring energy prices and high levels of indebtedness, with the prospect of higher interest rates on the way, many intend to cut discretionary spending in anticipation of even tighter household budgets.

That’s the finding of the latest AlphaWise survey conducted by Morgan Stanley, which paints an unsettling picture on the outlook for not only Australia’s retail sector, but also the broader economy.

Yes, the weakness in retail sales over the past two months may soon become entrenched. The “crunch time” for Australian households, as Morgan Stanley puts it, has begun.

“In early June, we expressed the view that the Australian consumer faces a domestic cash flow and credit crunch,” the bank wrote in a note released this week.

“Income growth has not recovered, ‘cost of living’ inflation is re-accelerating and ‘macro-prudential’-related tightening of credit conditions is extending from housing into consumer finance.”

In order to test how households may respond to higher interest rates, whether as a result of macroprudential measures to slow investor and interest-only housing credit growth or official moves from the Reserve Bank of Australia (RBA), Morgan Stanley conducted a national survey of 1,836 mortgagors to identify household conditions during late July and early August.

Australia’s 2016 census found that 34.5% of households were currently paying off a mortgage.

Morgan Stanley says the survey was designed to provide insight into the health of the household balance sheet, including their spending intentions as a result of higher mortgage rates.

The news was not good.

“Findings from the AlphaWise survey confirm the stresses in the consumer sector we have been highlighting for some time now,” it says.

“Most households have minimal buffers against a shock to their income, and expect to respond to higher debt servicing costs by drawing down on savings and cutting back on expenditure.

“Other sectors of the economy may be able to offset some of the headline weakness, but the concentrated exposure of the household sector and economy to an extended housing market is posing an increasingly important structural and cyclical risk to consumer spending.”

Of those households surveyed, 54% said they intended to cut back on expenditure in response to higher interest rates, with a further 25% planning to draw down on their savings to cope with higher servicing costs, a pattern that has been seen in Australia’s savings ratio which fell to a post-GFC low in the June quarter.

Somewhat alarmingly, 40% of those surveyed indicated that they did not save at all over the past year, particularly among low-income households.

Source: Morgan Stanley

“Respondents to the survey had extremely small income buffers, with around 40% stating that they did not save over the past year,” Morgan Stanley says.

“This was the case across the income distribution, including 30% of those earning more than $100,000.

“The RBA has referred to such households as living ‘hand-to-mouth’, and they largely attributed the lack of savings to an absence of income growth and a general increase in expenses, with a skew towards necessary rather than discretionary items.”

The bank says that the survey’s findings marry up with its consumer “crunch time” thesis where discretionary spending gets squeezed due to flat wage growth, rising essentials costs and tightening credit conditions.

And, perhaps explaining why consumer sentiment remains at depressed levels, Morgan Stanley says the majority of households expect this trend to continue.

“Only around 13% of respondents expect to be able to save more in the next 12 months,” it says.

“With households increasingly eating into their savings to fund expenditure, any shock to disposable income via further rate rises or lower income would have a disproportionate hit to consumption.”

For those unable or unwilling to draw down further on their savings, the survey found that many planned to cut back discretionary spending levels, especially when it came to holidays and social occasions such as entertainment or eating out.

“The survey suggests Holidays/Vacations and Entertainment/Dining are the categories consumers are most likely to cut back on as interest rates rise,” the bank says.

Providing clout to that view, it also mirrors weakness in the Ai Group’s Performance of Services Index (PSI) for September which revealed that activity levels across Australia’s hospitality sector — measuring accommodation, cafes and restaurants — declined at the fastest pace on record in September.

“Respondents in retail and hospitality are reporting reduced spending by consumers due to a mix of increased household electricity costs, flat income growth, and relatively poor consumer confidence,” the Ai Group said following the release of the PSI report.

Separate data from the Australian Bureau of Statistics (ABS) also found that spending at cafes, restaurants and takeaway food services fell by 1.3% in August, more than twice as fast as the decline in total retail sales over the same period.

Once is an anomaly, twice is a trend.

Throw in a third indicator, suggesting that households intend to cut back spending in these areas, and it’s understandable why many think this could be the start of a prolonged period of consumer weakness.

Morgan Stanley certainly thinks it is, forecasting that household consumption growth — the largest part of the Australian economy at a smidgen under 60% — will decelerate sharply over the next 18 months.

Source: Morgan Stanley

“We forecast the squeeze on overall disposable income will see discretionary consumption volumes slow to just 0.2% in 2018, dragging overall consumption growth down to 1.1% and well below consensus of 2.5%,” it says.

That growth in overall consumption next year would be only half the level Morgan Stanley is currently forecasting for 2017.

Given that pessimistic outlook, it says that official interest rates will remain unchanged at 1.5% throughout next year, making it somewhat of an outlier compared to current consensus.

“Combined with a broader slowdown in the housing cycle, we see the RBA staying on hold at 1.5% right through 2018, in contrast to the market pricing of a tightening cycle commencing [in the second quarter of next year]”.

And, given the risks, it says that government investment may need to ramp up even further in order to reduce recession risks.

“[Against] this backdrop, we see the gathering momentum behind a public investment program as necessary to mitigate recession risks, rather than sufficient to drive overall growth back to, or above, trend.”

The RBA’s latest forecasts have GDP growing at 3.25% by the end of next year before accelerating to 3.5% by the end of 2019. Both figures are well above the 2.75% level that many deem to be Australia’s trend growth level.

If Morgan Stanley is right about the largest and most important part of the Australian economy, those forecasts will be hard to achieve.

In such a scenario, it’s unlikely that wage or inflationary pressures would build to a sufficient level to justify a rate increase from the RBA. Indeed, it would likely spur on renewed talks of rate cuts, particularly should business and government investment start to weaken.

While there are plenty of good signals being generated by the Australian economy for the RBA to be optimistic about, especially when it comes to the labour market, should the household sector weaken further — and there’s more than a few signs that it is — it’s unlikely that the RBA would respond by making it even tougher for household budgets.

Morgan Stanley says the AlphaWise survey has a margin of error of +/-1.92% at a 90% confidence level.

Rising Household Debt: What It Means for Growth and Stability

From The IMFBlog.

Whilst increased household debt gives an economy a boost in the short term, the IMF has found it creates greater risk 3-5 years later, lifting the potential for a financial crisis, as household struggle to repay. Given the ultra-high debt levels in Australia, this is an important observation.

Debt greases the wheels of the economy. It allows individuals to make big investments today–like buying a house or going to college – by pledging some of their future earnings.

That’s all fine in theory. But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous.

A new IMF study takes a close look at the likely consequences of growth in household debt for different types of economies, as well as steps that policy makers can take to mitigate these consequences and to keep debt within reasonable limits. The overall message: there is a tradeoff between the short-term benefits and the medium-term costs of rising debt, but there is plenty that policymakers can do to ease this tradeoff, according to Chapter Two of the IMF’s October 2017 Global Financial Stability Report.

Given the widespread misery the crisis caused, you might think people have become skittish about borrowing more. Surprisingly, that’s not the case. Since 2008, household debt as a proportion of gross domestic product has grown significantly in a sample of 80 countries. Among advanced economies, the median debt ratio rose to 63 percent last year from 52 percent in 2008. Among emerging economies, it increased to 21 percent from 15 percent.

Reversal of fortune

In the short term, an increase in the ratio of household debt is likely to boost economic growth and employment, our study finds. But in three to five years, those effects are reversed; growth is slower than it would have been otherwise, and the odds of a financial crisis increase. These effects are stronger at the higher levels of debt typical of advanced economies, and weaker at lower levels prevailing in emerging markets.

What’s the reason for the tradeoff? At first, households take on more debt to buy things like new homes and cars. That gives the economy a short-term boost as automakers and home builders hire more workers. But later, highly indebted households may need to cut back on spending to repay their loans. That’s a drag on growth. And as the 2008 crisis demonstrated, a sudden economic shock – such as a decline in home prices–can trigger a spiral of credit defaults that shakes the foundations of the financial system.

More specifically, our study found that a 5 percentage-point increase in the ratio of household debt to GDP over a three-year period forecasts a 1.25 percentage-point decline in inflation-adjusted growth three years in the future. Higher debt is associated with significantly higher unemployment up to four years ahead. And a 1 percentage point increase in debt raises the odds of a future banking crisis by about 1 percentage point. That’s a significant increase, when you consider that the probability of a crisis is 3.5 percent, even without any increase in debt.

The good news is that policy makers have ways to reduce risks. Countries with less external debt and floating exchange rates, and which are financially more developed, are better placed to weather the consequences.

Mitigating risks

Better financial-sector regulations and lower income inequality also help. But this is not the end of the story. Countries can also mitigate the risks by taking measures that moderate the growth of household debt, such as modifying the down payment required to purchase a house or the fraction of a household income that can be devoted to debt repayments. So, good policies, institutions, and regulations make a difference – even in countries with high ratios of household debt to GDP. And countries with poor policies are more vulnerable – even if their initial levels of household debt are low.

Household Debt Burden Rises Once Again – RBA

The RBA has updated its E2 Household Finances Selected Ratios to June 2017. As a result, we see another rise in the ratio of household debt to income, and housing debt to income. Both are at new record levels.

In addition, we see the proportion of income required to service these debts rising, as out of cycle rates rises hit home. These ratios are below their peaks in 2011, when the cash rate was higher, but it highlights the risks in the system should rates rise.

We discuss this further in our September Mortgage Stress Data, to be released shortly. The debt chickens will come home to roost!

But the policy settings are wrong, debt cannot continue to grow at more than three times cpi or wage growth.

More Evidence Of Households In Financial Stress

A new report released today by the Centre for Social Impact, in partnership with NAB explores the complex reasons why many Australians are facing increasing financial stress. Financial Resilience in Australia 2016 builds on the 2015 report to show that while people are more financially aware, savings are shrinking and economic vulnerability is on the rise.

The overall level of financial resilience in Australia decreased between 2015 to 2016. In 2016, 2.4 million adults were financially vulnerable and there was a significant decrease in the proportion who were financially secure (35.7% to 31.2%).

Looking at the components of financial resilience, between 2015 and 2016: the mean level of economic resources did not significantly change and, in good news, people’s levels of financial knowledge and behaviour significantly increased.

However, people’s levels of access to external resources – financial products and services and social capital – significantly decreased and while savings behaviours were up, the amount of savings people have to rely upon has gone down.

Economic resources: stayed the same overall but there are concerns about savings markers.

On average, adults in Australia were better able to access funds in an emergency in 2016 (77.6% in 2015 to 81.4% in 2016). But almost 1 in 5 still could not, or did not know if they could raise $2,000 in a week and this rate was worse than findings by the ABS in 2014 (when approximately 1 in 8 were not able to find money in an emergency).

Of those who reported they could raise $2,000 in an emergency, 70.7% would do so through family or friends demonstrating the importance of social capital.

While more people were saving in 2016 compared to 2015, less money was being saved relative to people’s income. Almost one in three (31.6%) adults had no savings or were just two pay packets (<1 month of savings) away from serious financial stress if they were to lose their jobs. Like in 2015, almost 1 in 2 reported having less than three months of income saved (46.6 and 45.5% respectively).

Financial products and services: access has gotten worse

People were more likely to report having no access to any form of credit in 2016 (25.6%) compared to 2015 (20.2%) and no form of insurance (11.8% in 2016 compared to 8.7% in 2015).

A higher proportion of people reported having access to credit through fringe providers in 2016 (5.4%) compared to 2015 (1.7%).

There were no differences in the reported level of unmet need for credit overall, between 2015 (3.8%) and 2016 (3.7%). However, 1 in 10 reported having an unmet need for more insurance (10.0% compared to 9.7% in 2015) and an additional 11.6% (compared to 6.4% in 2015) did not know if they needed more insurance.

Financial knowledge and behaviour: has improved

Adults in Australia reported having a higher level of both understanding of and confidence using financial products and services in 2016 than in 2015. In 2016, 5.5% reported having no confidence using financial products and services and 4.5% reported no understanding at all, compared to 8.2% and 9.2% respectively in 2015.

There was a positive change in the population’s reported approach to seeking financial advice, with more people reported seeking advice at the time of the survey (7.8% in 2016 compared to 4.8% in 2015).

More people reported saving regularly in 2016 (60.2%) compared to 2015 (56.4%).

Social capital: has decreased

Although social capital overall decreased between 2015 and 2016, more people reported having regular contact with their social connections (68% compared to 36.6%).

A lower proportion of the population reported needing community or government support in 2016.

However, the proportion of people reporting a need for support but no access to it grew from 3.2% in 2015 to 5.3% in 2016.

Who is doing better? Who is faring worse?

Income, educational attainment and employment were all positively associated with financial security

Established home owners were also more likely to be financially secure, while people living in very short-term rentals were more likely to be in severe financial stress.

Younger people under 35 years of age were less likely than other age groups to experience financial security.

A higher proportion of people born in a non-English speaking country were in the severe and high financial stress categories, than people born in an English-speaking country, including Australia.

Mental illness was also negatively correlated to financial security, with a higher proportion of people with a mental illness experiencing severe or high financial stress (44.7% compared to 9.3% of people with no mental illness).

The Centre for Social Impact (CSI) is a national research and education centre dedicated to catalysing social change for a better world. CSI is built on the foundation of three of Australia’s leading universities: UNSW Sydney, The University of Western Australia, and Swinburne University of Technology.

Households Spending More On Basics

The ABS has released their 2015-16 Household Expenditure Survey (HES).

More than half the money Australian households spend on goods and services per week goes on basics – on average, $846 out of $1,425 spent.

Australian household spending on goods and services increased by 15% between 2009-10 and 2015-16, going from an average of $1,236 per week to $1,425.

Housing costs have accelerated significantly.

The data shows that more households now have a mortgage, while less are mortgage free. Rental rates remain reasonably stable, despite a rise in private landlords.

The goods and services that Australian households were spending the most on in 2015-16 were current housing costs ($279 per week), food and non-alcoholic beverages ($237 per week) and transport ($207 per week).

Average weekly spending on goods and services was highest in the Northern Territory and Australian Capital Territory ($1,700 and $1,670) and lowest in Tasmania and South Australia ($1,141 and $1,192).

“We can broadly think about household spending as either being for ‘basics’ or for ‘discretionary’ purchases – with basics covering essentials such as housing, food, energy, health care and transport,” ABS Chief Economist, Bruce Hockman said.

Today’s release shows that a growing portion of weekly outlays is spent on basics. Spending on basics accounted for 56 per cent of weekly household spending in 1984, growing to 59 per cent in 2015-16.

“The survey also shows that since 1984, the pattern of household spending has changed considerably,” explained Mr Hockman.

“In 1984, the largest contributors to household spending were food (20 per cent), then transport (16 per cent) and housing (13 per cent).”

“Jump forward to 2015-16, and housing is now the largest contributor (20 per cent), followed by food (17 per cent), and transport costs (15 per cent).”

More recently, since the last survey in 2009-10, the biggest increases in spending on goods and services by households have been in education (44 per cent), household services and operations, such as cleaning products and pest control services (30 per cent), energy (26 per cent), health care (26 per cent) and housing (25 per cent).

On the other hand, spending on alcohol, tobacco, clothing and footwear and household furnishings have not changed significantly from six years ago.

Mr Hockman added that, in 2015-16, 1.3 million Australian households (15 per cent) reported 4 or more markers of financial stress, down from 16 per cent in 2009-10. In addition, the proportion of Australian households who did not report experiencing any markers of financial stress has steadily increased, from 54 per cent in 2009-10, to 59 per cent in 2015-16.

‘Housing’ includes expenditure on rent, interest payments on mortgages, rates, home and content insurance and repairs and maintenance. Principle repayments on mortgages are reported separately.
‘Food’ also includes expenditure on non-alcoholic beverages and meals out. Expenditure on alcoholic beverages are reported separately.
‘Energy’ includes domestic fuel and power costs such as gas and electricity.
‘Health care’ includes expenditure on health practitioner’s fees, accident and health insurance, and medicines, pharmaceutical produces and therapeutic appliances.
‘Transport’ includes vehicle purchases and their ongoing running costs, public transport, taxi and ride sharing fares.
Proportions of spending are based on total goods and services expenditure. This excludes items which increase household wealth (such as the principal component of mortgage repayments).
Financial stress indicators include a range of items, such as not being able to raise emergency funds.
Estimates are for people who reside in private dwellings in Australia, excluding Very Remote areas.

Mortgage Rate Warnings Get More Strident

More people are now saying that households need to brace for mortgage rate rises. Among the crowd is Malcolm Turnbull who warned households to prepare for interest rates to climb.

It is all a bit late given the level of debt which we have across Australia. As we discussed before, the debt quagmire will really hurt.

It is not that employment is too bad, but incomes are static, costs are rising, and underemployment is the spectre at the feast.

But lets be clear, it is not a financial stability problem, yet. It is highly unlikely the banks will see their mortgage defaults rise that much, because currently many households are still protected by lofty capital gains sufficient to repay the lender. They also have tremendous pricing power, as has been demonstrated in the past few months, with a litany of out of cycle rate hikes. Expect more to come. Their capital base is strong, and rising (and APRA has been light on them). As a result, banks profits will rise – this explains recent stock market moves.

No, the real impact is among households. We think here are three groups of households who should be taking great care just now.

There are some amazing offers around for first time buyers, and lenders are falling over each other to try and attract them. This is because banks need new loans to fund their growth. But these buyers should beware. They are buying in at the top of the market, when rates are low. Banks have tightened their underwriting standards, but still they are too lax. Just because the bank says you can afford a loan does not mean it is the right thing to do. Any purchaser should run the numbers on a mortgage rate 3% (yes 3%) higher than the current rates on offer. If you can still afford the repayments, then go ahead. If not, and remember incomes are not growing very fast – best delay.

Second, there are people with mortgages in financial difficulty now. Well over 24% of households do not have sufficient cash-flow to pay the mortgage and other household expenses. The temptation is to use the credit card to fill the gap – but this is expensive, and only a short term fix. Households in strife need to build a budget (less than half have one) so they know what they are spending, and start to cut back. Talk to your lender also, as they have an obligation to assist in cases of hardship. And be very careful about refinancing your way out of trouble, it so often does not work.

Third there are property investors who are seeing rental incomes and mortgage repayments moving in opposite directions. As a result, despite tax breaks, the investment property looks a less good deal. Of course recent capital gains are there – and some savvy investors are selling down to lock in capital value – but be careful now. New property investors are in for a shock as mortgage rates rise further. And multiple investors, are most at risk. Should property values decline, then this will mark the real turning point; but we think the investment property party may be over.

This will play out over the next couple of years, but the bottom line is simply, mortgages will be more expensive, and households need to prepare now. Turnbull is right.

What income inequality looks like across Australia

From The Conversation.

With affordable houses increasingly out of reach, wage growth slow and household debt high, Australians are certainly feeling poor. But how do they compare to their neighbours? New Census data confirms there’s a lot of variability in income.

The Census breaks the country up into 349 geographic regions (named in quote marks below), some of which cover more than one major town and some of which group related suburbs within cities. We examined 331 of these regions, excluding those containing fewer than 1,000 households.

The data show there are high levels of income inequality within these regions. A simple way to measure this is to look at the ratio of income between those who are well off (the top 20% within a region) and of those who are relatively disadvantaged (the bottom 20%) in the Census data. In Australia the weekly household income for the top 20% (A$1,579 per week) is 3.5 times the income of the bottom 20% (A$457).

The “Melbourne City” region has the most unequal incomes in Australia, where the top 20% have an income that is 8.3 times as high as those in the bottom 20%. “Adelaide City” (ratio of 5.5) and the “Sydney Inner City” (4.8) also have quite high levels of inequality.

Two of the poorest regions in the Northern Territory also have very high inequality. These are the vast region that encircles Darwin, called “Daly, Tiwi, West Arnhem” (ratio of 5.2) and the “East Arnhem” region (5.3).

However, there are regions with varying income levels, that also had relatively low inequality ratios. The region of “Molonglo”, in South Canberra (ratio of 2.2), “West Pilbara” in Western Australia (2.4) and “Kempsey, Nambucca” on New South Wales’ north coast (2.5) all have low levels of inequality.

For our analysis, we used equivalised household income. Equivalisation is a technique in which members of a household receive different weightings, based on the amount of additional resources they need.

The Australian Bureau of Statistics assumes that the first adult in a household has a weighting of 1, each additional adult a weighting of 0.5, and each child a weighting of 0.3. Total household income is then divided by the sum of the weightings for a representative income.

Incomes across Australia

For the whole of Australia, the equivalised median household income (the income in the middle of the distribution) is A$878 per week. The region with the lowest median income was “Daly, Tiwi, West Arnhem” in the Northern Territory, at A$510 per week.

However, several regional areas like “Maryborough, Pyrenees” (northwest of Ballarat in Victoria), “Kempsey, Nambucca” (NSW), “Maryborough” (between Bundaberg and the Sunshine Coast in Queensland), “Inverell, Tenterfield” (in NSW’s Northern Tablelands) and “South East Coast” in Tasmania all had median incomes of A$575 per week or less.

At the other end of the distribution, households in leafy suburbs of North Sydney – “Mosman” (NSW) had a median income of A$1,767 per week. Areas like “South Canberra” (ACT), “Manly” (in Sydney’s east) and the mining-dominated “West Pilbara” (WA) all had median incomes of A$1,674 or more per week.

We also looked at the extremes of the distribution. We define high income as those households with an income of A$1,500 or more per week. This equates to about 22% of the population. We defined low-income households as having an income of less than A$400 per week (about 14% of households).

Around 40% of households in the “Daly, Tiwi, West Arnhem” region were classified as being in poverty compared to around 6% in “North Sydney, Mosman” region. Conversely, around 60% of households in this region were classified as having high income, compared with only 6% of households in “Kempsey, Nambucca”.

How segregated are we within regions and cities?

While government policy is often delivered at the regional level, people live their lives at the local or neighbourhood level. However, the relatively disadvantaged and the upper-middle class are often segregated within these regions.

Richard Reeves of the Brookings Institute argues the segregation of the upper-middle class in Australia means this group “hoards” the benefits in the region they live in. Among the location advantages he lists are: access to the best schools, opportunities to network with the wealthy and powerful and the ability to disproportionately accrue capital gains on housing assets. To avoid this kind of “opportunity hoarding”, the rich and poor would need to be evenly spread within a region.

A simple way to look at this is through a “dissimilarity index”. In essence, this measures the evenness with which two groups are spread across a larger area. It ranges from zero to one, with higher values indicating a more uneven distribution and zero indicating complete mixing.

Looking at the distribution of the high income. Across Australia, the dissimilarity index has a value of 0.27. This means that around 27% of high-income households would have to move neighbourhoods to make the distribution completely even.

This varies quite substantially by region. “Far North” (encompassing Cape York in QLD) has a dissimilarity index of 0.42. “Auburn” (in western suburbs of Sydney, NSW) and “Playford” (on Adelaide’s northern fringe) also have quite large values.

Our richest regions tend to have the most even distribution of the wealthy, with “North Sydney, Mosman”, “Molonglo” and “Manly” having values of 0.06 or less.

“East Arnhem” has a very high level of concentration of low income individuals by neighbourhood, with a dissimilarity index of 0.70. The next two highest regions (“Katherine” and “Alice Springs”) are also in the Northern Territory, with index values of 0.53 and 0.55 respectively.

We can also compare the measures we used, to find out how they relate to each other. The following figure shows that the richest regions tend to be those with the highest level of income inequality.

However, as inequality goes up, there tends to be a greater concentration of low income households by neighbourhood (there’s also less of a concentration of high income households).

Have and have nots

It’s true that the level of income mobility is higher in Australia than it is in the US. However, Australia also has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives.

Australia also has a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

If Richard Reeves is right, and the spatial segregation of high and low income households reinforces inequality across the generations, then policies that encourage the mixing of different social classes in the same neighbourhood and region should be a way forward.

Authors ; Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University; Francis Markham, Research Fellow, College of Arts and Social Sciences, Australian National University

Australian household debt breaks new records

From The New Daily.

The Reserve Bank board will be facing record-high debt levels when it decides on Tuesday whether or not to follow other central banks by lifting the official cash rate.

Ten years after the global financial crisis – which many trace to the collapse of two Bear Sterns hedge funds in July 2007 – Australians are more indebted than ever, largely because of mortgages.

The latest official data, published by the Reserve Bank on Friday, showed that Australian households owed debt in the March quarter equal to 190 per cent of their yearly disposable income – a new all-time high.

In a speech in May, Reserve Bank governor Dr Philip Lowe blamed this trend on a combination of low interest rates, slow wages growth and house price rises fuelled by overseas investor demand and strong population increases.

At its last interest rate meeting in June, the RBA board cited persistently weak wages growth as a key factor in it keeping the cash rate on hold at a record-low 1.5 per cent – where it was widely forecast to stay on Tuesday.

Household debt will no doubt weigh heavily on the minds of the RBA board.

Last month, the Swiss-based Bank for International Settlements captured headlines across the nation by warning that Australia’s surge in household indebtedness was likely to constrain future economic growth and increase our susceptibility to another crisis.

Global ratings agencies Moody’s and Standard & Poor’s have also downgraded the creditworthiness of Australian banks over fears about unsustainable debt and inflated house prices.

Australia’s debt-to-income ratio concerns many experts because it is globally unusual – and because high household debt frequently coincides with financial crises.

Not even the US, just before it plunged much of the world into economic chaos, had a debt-income ratio as high as Australia’s current 190 per cent. Estimates put US household debt closer to 140 per cent in 2007.

Further data from the Reserve Bank confirmed that Australia’s debt mountain is largely a consequence of soaring property prices.

In the March quarter, Australian housing debt reached 135 per cent of annual disposable income, according to the RBA, breaking another record.

Homeowners hold a large share of the debt.

According to the Reserve Bank, the ratio of owner-occupier housing debt to yearly income hit 101.8 per cent in the March quarter – yet another all-time high.

The reason the Bank for International Settlements predicted that Australia’s economic growth would be curbed by debt was that inevitable interest rates rises would reduce disposable income of indebted households.

Household consumption is crucial to Australia’s economic growth – it accounted for 57 per cent of GDP in the March quarter. Rate rises could put that GDP figure at risk by reducing spending, the BIS said.

This is a key reason why most economists are predicting the Reserve Bank won’t hike the cash rate on Tuesday.

The RBA Shadow Board – an independent panel of economists – has put a 59 per cent probability on a rate hold being the right decision on Tuesday, compared to a 39 per cent probability for a rate hike, and only 2 per cent probability for a rate cut.

“The spotlight is turning again to the high indebtedness of Australian households,” the Shadow Board noted.

However, there is some good news on debt. A wealth divide in the Australian housing market could lessen the risk of a US-style mortgage crash.

According to the RBA governor, housing debt is heavily skewed towards the wealthy.

“This is different from what occurred in the United States in the run-up to the subprime crisis, when many lower-income households borrowed a lot of money,” Dr Lowe said in May.

The bad news is that these mortgages are increasingly invading our retirement.

“Borrowers of all ages have taken out larger mortgages relative to their incomes and they are taking longer to pay them off,” Dr Lowe said.

“Older households are also more likely than before to have an investment property with a mortgage and it has become more common to have a mortgage at the time of retirement.”