Households and disleveraging

The RBA released its quarterly Household Finances ratios (B21 XLS table) yesterday, which highlights the following ratios going back to March 1977 (in most forms):

  • Debt to Assets
  • Housing debt to Housing Assets
  • Debt to Disposable Income (total, housing and owner occupier)
  • Assets to Disposable Income
  • Interest Payments to disposable income

Instead of waiting for the monthly chart pack (which I’ve reviewed previously here and here) here is the data represented graphically.

First, Debt to Disposable Income has been at ca. 160% since June 2006. The small decline in 2008 was rebounded by the “RuddPrime” mortgage increase, but that too is passing, and the trend is flat.


Housing debt comprises the majority (89% of total debt), with owner-occupiers housing debt comprising 62% of total (at 97% of household income).


The global loan value ratio (LVR) of housing debt to assets is 29.7%, down from the March 2009 peak of 31.5%, but still on trend from the 1995 “structural” change.

The asset to disposable income ratio has still not recovered from pre-GFC Episode 1 highs (September 2007), down approx. 10% in both financial and total asset values.

Finally, the serviceability of the outstanding debt requires 11.7% of total disposable income (9.6% for housing debt), which is well above the long term average at 7.5%, and the highs reached during the scorching 17% high interest rate period of the early 1990’s, but still below the pre-GFC high of 13.6% in September 2008.


Interestingly, the current average standard mortgage rate (just below 8%) when last reached in 2006 and before that during the year 2000, required just above 10% and 6% of household disposable income respectively, compared to the near 12% of today. This is purely a function of the higher debt levels and maybe something for bullhawks to look at more closely before espousing more rate rises.

Comments

  1. “but still below the pre-GFC high of 13.6% in September 2008. But then, of course, asset prices were rising.”
    House prices and stock prices were falling in September 2008.

  2. The point is Suzi, at a lower RBA cash rate, households still are spending a larger amount of their disposable income on servicing debt.

    Stock prices had fallen by Sept 08 (and not many had margin loans that impacted disposable income) – but house prices were “stable”, not tapering yet.

    It is clear that household wealth has not yet recovered from the GFC, still down 10% from the nominal high.

    • Will the RBA turn its head to inflatoin like the UK has?

      Will China let its currency appreciate and the sudden onset of high cost goods come to pass after 20 years of cheap goods?

      Will the AUD tumble?

      Many questions – many possibilities.

      We are moving through many structural changes that will be with us for a decade x 2.

      The only way nominal prices will increase (and therefore debt reduction) is through the washout after some SIGNIFICANT inflation hits they world.

      But inflation and equity markets don’t generally “fly”.

    • “Stock prices had fallen by Sept 08 (and not many had margin loans that impacted disposable income) – but house prices were “stable”, not tapering yet.”

      No. House prices were falling. These are the ABS price indices for the 8 cap city weighted average:

      Mar 2008 131.0
      Jun 2008 129.9
      Sep 2008 126.5
      Dec 2008 124.8
      Mar 2009 123.8

      “It is clear that household wealth has not yet recovered from the GFC, still down 10% from the nominal high.”

      No. See RBA table B20. Net household wealth = Column B+C+I-J

      Dec 2007 = $5.069t (the pre-GFC high)
      Mar 2009 = $4.312t (the low point)
      Dec 2010 = $5.494t

      Total net household wealth has increased by 27% since its low (Mar 2009) and at Dec 2010 it was 8% above its pre-GFC high.

    • Thanks for pointing that out Suzi – to the exclusion of all other factors….

      As I said: The asset to disposable income ratio has still not recovered from pre-GFC Episode 1 highs (September 2007), down approx. 10% in both financial and total asset values.

      I.e the secondary market value of the underlying wealth has increased, but the ratio of wealth to income has fallen.

      And you forgot to mention that to go from $5.069t (the pre-GFC high) net household wealth in Dec 07 to the Dec 10 $5.494t, or a net increase of $425bn was done through an increase of $340 billion in new debt.

      Hardly makes for a robust return doesnt it? Increase wealth by 8% but also increase your debt by 24.7%….

  3. “Debt to Disposable Income has been at ca. 160% since June 2006.”

    doesn’t this have to come way down to what it was before, i.e. 40%, to become ‘normal’ again?

    • It all depends on what you consider normal, and consider that the consensus view is it doesn’t matter what level it is (only public debt matters, and Australia’s is only 22% of GDP – for now).

      The real issue is the rate of change, because it is empirically clear that the increase in debt increases aggregrate demand – i.e GDP.

      If you have stagnant or decelerating credit growth, this takes away aggregate demand potential and GDP growth.

      Hence why we are experiencing ca. 1-2% real GDP growth and not 4% plus like the boffins at Treasury/RBA/ICAP et al are expecting.

      “Normal” to me is lending reverts to productive purposes – i.e away from housing and towards business enterprises.

      • actually truth is that public debt doesn’t matter because it will never be repaid anyway,
        private debt is the only real debt

      • true – good to hear. I always hear calls to about returning to the ‘good old days’ your explanation is much appreciated.

  4. I don’t know if this banking news has been discussed here yet, but ANZ’s David Taylor says housing is a worry.

    http://www.abc.net.au/worldtoday/content/2011/s3273284.htm

    “ELEANOR HALL: Australia’s banking regulator today called on the nation’s banks to put plans in place in case of another financial crisis.

    APRA asked the big four to draw up what it’s calling “living wills” or contingency plans that would help” prevent a financial panic.

    Analysts say the regulator is indicating that the banks were too reliant on the Reserve Bank during the last credit crisis.

  5. Horrifying figures but I’ve heard spruikers use similar stats to say that there is no problem here.

    What I’d like to see is the top 20% of households with the highest debt levels and the rest of their balance sheets and income.

    • Horrifying figures? Depends. If you want to be a TBTF entity they look great. The TBTF entities can muscle down the govt. for the “fry the dollar” or “fry the superannuation funds,” or both. Great figures for socialising losses and privatising profits.

      “What I’d like to see is the top 20% of households with the highest debt levels and the rest of their balance sheets and income”.

      What I’d like to see is the above statement replacing “households” with bank & finance staff, public servants & politicians, regulators etc. Let’s see what the vested interests of decision makers are.

  6. “The disposable asset to income ratio ” – should be disposable income to asset ratio?

    Very interesting, thanks Prince.

    The combination of measures tells me that any move in interest rates will exert multiple times the impact on the economy now than it would have in 1990. Such a large proportion of disposible income going to servicing debt with such massive levels of indebtedness, a 25bp move now must have about the same impact as a 100bp move in 1990 when we had a quarter of the debt level (or am I missing something – I could be, it is Friday). Unfortunately I think that could work the other way too, a premature 25bp cut could make people feel so liberated they go on another spending spree.

    • Fixed, thanks Miss P.

      Yes, interest rate sensitivity is much higher as the total stock of debt increases.

      The ongoing downtrend in the RBA cash rate highlights this (see my June review of the RBA Chart Pack)

      There maybe a small chance of another debt binge spending spree if rates are cut 25 to 50bps, but this has not worked in another nations with similar debt dynamics, even down to ZIRP. The household savings ratio is firmly positive for the time being.

      Anyway, rates cut punish those of us who save and take away future consumption (less savings, less interest, less future spending)

    • July Terms of trade at 140 year high!!! All time high prices for Australia commodities.

      Inflationary – Nah….

      Currency appreication – Nah

      Interest Rates – Lets ask Bill Evans….”ummmmmmmmmmmm – me thinks Big rate Cut!”

    • I disagree that rates can be dropped in Australia to create another spending spree. Yes a drastic rate cut would “ease the squeeze” as our moronic leaders call it, but this is not the same as providing the ability for people to go to shops and spend spend spend.

      I think this is one of the most important issues in seeing how the crash will play out. If the June (released 2 August) ABS figures are as bad as I think they will be, then I think we will see a lot of talk about the need to raise rates.

      But can you imagine any spruiker having the hide to try and tell people that lower rates = a good time to buy.

      Aussie debt addicts are dumb, not not insane. They have seen the way central bankers use rates like a yoyo and they will not be lured by temporary low rates.

      The Rudd-Reflation was primarily bcause of Fiscal stimulus and a naievity amonsgst Australians…I think people are waking up, slowly!

      • Agree Stavros, people are just going to keep paying off their debts. At a BBQ last weekend, early-adopter friend tells me he’s going into “austerity mode” (his words), when that becomes barbie banter you know things have changed!

      • Yeah Jackson, I have heard very similar things…people are talking about having more frugal weddings and how they are saving money on food by cooking more.

        This is not a nation waiting to get back on the debt-train…they are just hoping they dont get steamrolled.

        * correction from my above post, I meant to say:
        I think this is one of the most important issues in seeing how the crash will play out. If the June (released 2 August) ABS *HOUSE PRICE figures are as bad as I think they will be, then I think we will see a lot of talk about the need to *DROP rates.

      • I don’t fully agree. On the face of the data I can see we are disleveraging nationally, but this has been in response to expected interest rate rises so people knew they needed to trim the fat. However I don’t think the change in sentiment that has started reverberating with Bill Evans and others has been seen in the data yet and I’m not convinced that people won’t be fooled by their extra cash-flow if rates move down too early (where I would define too early as any time before it is obvious to the populous that we’re clearly not in Kansas anymore – granted that’s a pretty vague definition). From my interactions (mainly baby-boomers and Gen Y – perhaps it’s different with Gen X or in different parts of the country) there is no understanding of what may lie ahead, no sense to reduce spending if the cash flow is available. Even people I know in banking, who are heavily mortgaged have not indicated any concern. I’d say we should never underestimate the ignorance within the wider population to be hood-winked with a rate cut.

      • Yes Miss P

        That is my experience as well. Less exuberance but not exactly the bearishness that comes when most people know of someone or someone’s mate who has lost a job.

        An interest rate cut will not be quite as stimulating as in the past but it will get more than a few back in the shops and watching the Block with mad plans

      • > On the face of the data I can see we are disleveraging nationally, but this has been in response to expected interest rate rises

        That’s my impression too. People have been conditioned for too long that our economy is invincible and that house prices will ultimately go up more than they temporarily drop. We have not had a real housing crash, big job losses and high interest rates for too long to change the way people think. I am afraid that without a recession there’s no way people will really change their habits. Lowering interest rates too soon by too much will only kick the debt can down the road and delay the inevitable full force deleveraging and return of house prices to the long term mean.

      • Stavros: “a naievity amonsgst Australians…I think people are waking up, slowly!”

        Yes, I see this at the individual level.
        But it seems that as soon as one person wakes up to the rort that is RE market and new dope gets ‘enlightened’ by the MSM spruiking that RE is a good deal.
        The lightbulb goes on in the head and a new ‘investor’ is born. More stupid than the last investor who just came to his/her senses and perfect for a struggling RE industry.