Housing research group CoreLogic reported this week that “housing debt to disposable income” reached “a new record high” in the December quarter.
No news there, of course, because the ratio of debt-to-income has been hitting ‘new highs’ pretty well every quarter since 2010.
But what makes that statement different this time around is that house prices have turned – and yet borrowing continues as if they had not.
CoreLogic notes: “Over the past year, there has been a deceleration in the increase in household assets while household debt has continued to expand at a fairly consistent pace. With dwelling values now declining over the coming year(s) the value of debt may expand at a faster pace than the value of assets.”
Australians are close to the top of the international league table for private debt, and over two-thirds of that debt is secured against our houses.
So all CoreLogic is pointing out is that if house prices fall but debts keep being racked up at the same pace, a growing number of households will have borrowed too much.
As you might expect, this disproportionately affects low-income Australians, with 69 per cent of mortgage holders in the bottom one-fifth of income earners being over-indebted, according to the Australian Bureau of Statistics (see chart below).
The ABS defines a household as over-indebted “if their debt is either three or more times their income, or 75 per cent or more of the value of their assets. Some households will be over-indebted on both criteria”.
And if the ‘assets’ measure is used to assess over-indebtedness, a staggering 89 per cent of that lowest quintile have borrowed too much according to the ABS.
So why aren’t regulators holding urgent media conferences to highlight this debt emergency?
Well, firstly, because they don’t like to scare the horses, but secondly because the way the Reserve Bank, Treasury, Australian Prudential Regulation Authority and others look at debt is not the way your average householder does.
The RBA likes to look at debt from a ‘macro’ perspective, with its monthly chart pack showing the ratio between the debts of all households to the asset values of all households.
When you do that, there doesn’t seem much cause for alarm. Across the nation, our total housing debt is about 25 per cent of the value of our housing assets.
That paints a pretty distorted picture of the pressure being felt, particularly among younger Australians, as wage rates continue to lag behind house prices (see below).
Remember, too, that the nation’s stock of housing debt is concentrated into the third of households occupied by mortgage-holders and the third that are financed as rental properties (the other third are already paid off).
Moreover, the asset values totted up by the RBA to produce that relaxing 25 per cent figure can go down as well as up.
If house prices continue to slide for an extended period, it’s not just mortgage-holders’ dwellings that fall in value – it’s the whole lot.
The boom in Australian house prices that began with the turn of the millennium has always been about incomes, not asset values.
Even with record low interest rates, which make enormous debts serviceable, the problem with the house price boom is the huge deposits first home buyers have to spend years saving for, and the risk of rising interest rates crushing them at some point in what is often a 30 year commitment.
So as we hit another record for debt-to-income ratios, let’s throw the debt-to-asset ratio in the bin.
Our addiction to debt is still out of control, and in a falling market that hurts younger, poorer home buyers the most.