Australia has a tendency to rejoice in its hardship – we recite “drought and flooding rain” with pride, delight in telling tourists about deadly snakes and spiders, not to mention crocodiles and stingers.
And you can add to that list the “record household debt” that we like writing scary headlines about and is the stuff or regular warnings of disaster from the Doom ’n’ Gloom brigade.
Yes, we do have a high level of household debt – but it seems we are reasonably comfortable with it.
The thing that matters most about debt is the ability to service it – the interaction of interest rates and household income. The size of the debt per se doesn’t matter so much.
It turns out the ratio of household interest payments to household income has been fairly steady for the past five years. Average out those five years, and the interest rate burden is about the lowest it’s been in 14 or 15 years. It’s a great deal less that it was during the boom just before the GFC hit and is less than it was in the lead-up to the last recession three decades ago.
Independent property analyst Pete Wargent has knocked up a nice graph from Reserve Bank figures to tell the story. The percentage of our household income required to pay the interest on our total household debt and our specific housing debt doesn’t look especially concerning.
The RBA figures are before the latest two official interest rate cuts, so you’d expect the graph’s latest number of 9 per cent will dip a bit lower, especially if the average Australian doesn’t get too enthusiastic about borrowing a lot more. The behaviour of consumers at present indicates that we’re more in the mood for reducing debt than increasing it.
But the average Australian household not being crucified by the cost of servicing borrowings doesn’t make for a scary headline – so you don’t read about it much.
It’s much easier to scare the horses with graphs of gross household debt to disposable income heading forever higher.
Pete Wargent has a clear graph on that, too. It happens to show that the ratio has stabilised over the past year or so at just under 190 per cent.
Graphs and averages only tell part of the story. On the “record debt level” side, the headline writers concentrate on gross debt, not our net debt, which is misleading.
Many a housing investor has a big mortgage, but also a big offset account. The big mortgage shows up in the graph of gross debt, but in the real world, the borrower has little debt and the real interest cost is reduced.
Another factor in boosting our headline debt figure is that Australia overwhelmingly relies on households to provide rental accommodation. Other advanced countries tend to have more government and/or corporate landlords.
Thus, the household sector not only carries the debt of owner-occupied housing, but all those negatively and positively geared rental properties.
As previously reported, the jury is out on just how effective RBA interest rate cuts are now in stimulating economic growth. The bank itself has repeatedly warned that monetary policy can’t sustainably provide growth.
What is a safe bet though is that many households will take the opportunity of lower rates to pay down their mortgages more quickly – they’ll leave their repayments the same while paying less interest.
Along with wage rises, however small, over time, we should see both our “record household debt” and ratio of income to interest payments edge lower.
This is the opposite of what was being widely reported 18 months ago. As Pete Wargent has put it:
“There were heaps of excitable articles doing the rounds about the [presumably psychological] significance of household debt hitting 200 per cent of disposable income – some even wrote about the ratio hitting 300 per cent, for reasons that weren’t entirely well thought through.”
But it did make for scary headlines.