You know Australia’s household debt crisis? Yes, yes, everyone knows that one – it’s guaranteed scary headline material regularly regurgitated by every galah in the commentary pet shop.
Trouble is, the galahs only tell part of the story. If they told the full story, it’s not quite as bad as they like to make out.
Australia’s level of gross household debt as a percentage of disposable income is indeed very high – record levels, among the world’s very worst etc, etc. A graph the Reserve Bank produces monthly makes this very clear.
The way the RBA now pairs the debt graph with housing prices points a clear finger at what it likes to blame.
Last week’s release of the latest RBA board minutes included a summary of a report to the board on household debt. I’ll include the whole three paragraphs in full at the end of this article if you’re interested – but there wasn’t anything startling or new about it.
Basically, the RBA found we have a high level of household gross debt compared with other countries because most of our rental housing is owned by households – rather than governments or companies – and housing is expensive. The RBA reckons household balance sheets deserve “close and careful monitoring”. Congratulations RBA.
What the RBA minutes didn’t mention is the difference between our gross and net household debt – almost nobody does. It’s rather important though.
Back when Joe Hockey was shadow treasurer, he tried for a while to talk about the federal government’s gross debt – because it was a bigger and scarier number than the government’s net debt. He was quickly laughed out of town on that one and went back to the number that counts – net debt.
But almost nobody makes the same sensible distinction about household debt.
Tucked away in the CBA’s annual results last year was a very interesting graph. It showed that household net debt (loans minus what we have on deposit and in cash) actually peaked a dozen years ago, came off a little and hadn’t done all that much since. Not quite so scary, is it?
But who wants to let facts get in the way of a scary story?
Amid the tonnes of research done on housing and debt in recent years, one of the things to be shown was that Australians love a good offset account. Owner-occupiers and investors alike see the sense of parking every spare cent in an offset account to reduce their interest payments.
Especially for owner-occupiers with a mortgage, the offset account makes a great deal of sense. The interest saved is the equivalent of a very respectable after-tax return on the money, it helps pay down the mortgage a bit faster and it provides nice flexibility to have the cash available if it’s required.
So it would be reasonable to think anyone interested in serious commentary about household debt levels would deal with net debt – but they don’t.
And here’s another graph that tells you a lot about the real story. Unfortunately it’s a little old, as the RBA stopped including it in the bank’s monthly chart pack, replacing it with the graph of gross debt and house prices.
What counts most about debt is its serviceability, rather than its absolute size. What this graph shows is that while our gross debt has soared, what it costs us in interest (as a percentage of household disposable income) is about as low as it has been in 14 years.
One is left to speculate about why the RBA would stop issuing this graph. It would be churlish of me to suggest it was because the bank was a little embarrassed about the obvious correlation of cheap money and sharply higher gross debt.
The ‘DGB’ (Doom & Gloom Brigade) will be quick to shout a couple of things at this point.
Firstly, the debt might look cheap to service now with interest rates at record lows, but when rates rise, it will hurt like hell.
‘We’ll all be rooned’
And, secondly, all this discussion is about the average household and averages hide a lot of reality. The average household might be doing fine, but there are plenty of people who have borrowed as much as they can that leaves them little leeway if their circumstances change.
On the first point, the RBA is fully aware of the risks, which is why rates aren’t going up here until wages are rising enough to be able to handle it. And, even then, rates won’t be rising much.
The RBA has already told us that when wages growth is hunky-dory again and the economy is absolutely tickety-boo, its cash rate should only be 200 points higher. The authorities already require banks to check that a borrower could handle another couple of per cent on their home loans.
Also, as the RBA minutes allude, much of the household debt is held by people who are fairly well off and can afford the risk anyway.
The DGB’s second point is valid. There are and will always be some people close to the edge who will suffer when things change – a job loss, sickness, divorce, perhaps dropping back from two incomes to one.
There also are property investors who bite off a bit more than they can chew when they find property prices don’t always keep going up rapidly.
But that’s capitalism – borrowing to buy a home can’t be guaranteed to be a painless and sure thing.
The track record, personal finance realities and our population fundamentals still point to owning your own home being a desirable thing. But life always has risks.
The RBA and APRA were a little late in applying the brakes on the housing boom, cooling the wilder lending, but it has been done now, and it looks like the market is having a soft landing.
Again, 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.