Monthly Archives: October 2014

YET ANOTHER PERSPECTIVE THAT ITS ALL GOING PEAR-SHAPED

Housing leverage hits a record high  an article by Article by RP Data senior research analyst,
Cameron Kusher

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

When you look at the key driver of the increase in the ratio, it is no real surprise that leverage in the housing market is the major driver. As at June 2014, 137.1% of the 151.1% total household debt figure or a record high 90.7% was housing debt. In fact the 137.1% ratio of housing debt to disposable income is a record high and up from 136.1% the previous quarter and 133.3% a year earlier. As was the case with household debt, you can see that housing debt was relatively unchanged for a number of years but has recently started to rise once again.

 

The RBA breaks this data out further to owner occupiers and investors. Of that 137.1%, 90.9% (or 66.3% of the 137.1%) was to owner occupiers with the remaining 46.2% (or 33.7% of the 137.1%) to investors. The proportion of overall housing debt to owner occupiers is trending lower at the moment while investor debt rises.

The data also includes information on the value of assets to disposable income. According to the statistics, the ratio of total household assets to disposable incomes is 801.9%. This figure is now at its highest level since March 2008. This 801.9% is split into housing assets which account for 433.6% and financial assets which make up the remaining 342.2%. The housing assets figure is at its highest level since June 2008 while the financial assets figure is lower over the quarter, down from 342.9% in March.

 

The chart highlights the trends over time. What they indicate is that households have consistently stored a majority of their wealth in housing assets as opposed to financial assets. Unfortunately the data is not available prior to 1988 so we don’t have visibility on the results prior to that time.

Chart 4 looks at the annual change in the ratio of housing debt to disposable income plotted against the annual change in combined capital city home values. Although the ratio of housing debt to disposable income is rising it is doing so at a much more moderate pace than it has in the past despite quite strong growth in home values. It is difficult to know exactly why this is happening however, the RBA has reported in its latest Financial Stability Review that the typical mortgagee has more than 2 years’ worth of mortgage repayments sitting in mortgage offset or redraw facilities. This may go some way to explaining the moderate rise. Alternatively, a rise in foreign buyers could also be a contributing factor. Other potential reasons include lower loan to value ratios or investors purchasing using significant equity in their principal place of residence.

 

The data highlights that household and housing debt is increasing and with home values continuing to rise we would anticipate a further rise in both measures over the coming quarter. The RBA has previously stated that further increases in household debt are not ideal. With housing debt at a record high level and investor activity at near record highs, I don’t think it is any surprise that the RBA is looking to macroprudential tools to take some of the heat out of the housing market.

 

You don’t need the charts – the words tell it all.  Be very careful folks…

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