The stress in household credit

Yesterday, in a post about some long term housing data, I added an M3 chart that got a bit of attention. For those who don’t know, M3 is a broad measure of money in the Australian economy including all types of deposits in the lending institutions. As “loans create deposits” M3 is a good proxy for a measure of the amount of banking credit that is been created. You can see from the chart that over the latest 20 years Australia has been on a credit binge, something that the MB team cover constantly.

What makes that chart more interesting is that it is almost a mirror image of the inflation data over the same period.

It should now not be a surprise to anyone why Australian housing has performed so well over the last 4 decades.

But there is another side to all of this credit and that is the underlying asset values and income that support it. To understand that we need to have a look at RBA’s housing finance data (B21). This data is quarterly and is badly lagged. Yesterday’s release was for March.

Firstly the caveats.

  • Data are seasonally adjusted, unless otherwise noted.
  • Debt refers to total household debt as calculated by the RBA and is the sum of housing and other personal debt, including securitised debt. Debt excludes debt owed by unincorporated enterprises. These data are adjusted for the effects of breaks in the series.
  • Assets refers to the total of dwelling assets, consumer durables and financial assets as reported in statistical table B20.
  • ‘Financial assets’ includes financial assets of unincorporated enterprises and is not seasonally adjusted. Financial assets data are derived from ABS Cat No 5232.0, Table 20. The sectoral classification is on a national accounts basis and differs slightly from that in the preceding tables.
  • The household sector includes unincorporated enterprises and non-profit institutions serving households. Identified claims between transactors in the same sector are excluded. The data were upgraded in 2009 to comply with SNA08 standards and are only available back to June 1988.
  • ‘Debt to assets’ refers to the ratio of total household debt to total household assets.
  • ‘Housing debt to housing assets’ refers to the ratio of housing debt (including securitisations) to total dwelling assets.
  • For the purpose of calculating ‘Assets to disposable income’ and ‘financial assets to disposable income’, ‘disposable income’ includes gross mixed income earned by unincorporated enterprises and is measured before the deduction of net interest payments. Data on disposable income are sourced from the quarterly national accounts (ABS Cat No 5206.0) and are reported in annual terms.
  • ‘Debt to disposable income’ is the ratio of total household debt to household disposable income. ‘Debt to disposable income – Housing’ is the ratio of housing debt (including securitisations) to household disposable income. ‘Debt to disposable income – of which: Owner-occupier’ is the ratio of owner-occupier housing debt (including securitisations) to household disposable income.
  • ‘Interest payments to disposable income’ is the ratio of interest payments on housing and other personal debt to disposable income. From 1993, these data are calculated by the RBA using average interest rates on outstanding housing and other personal debt. Interest payments prior to 1993 are sourced from unpublished ABS data.
  • ‘Interest payments to disposable income – Housing’ is the ratio of interest payments made on housing loans to disposable income.
  • For the purpose of calculating the ‘Debt to disposable income’ and ‘Interest payments to disposable income’ ratios, disposable income excludes gross mixed income earned by unincorporated enterprises and is measured before the deduction of interest payments. Data are sourced from the quarterly national accounts. For the debt to disposable income ratio, data are reported in annual terms.

So basically these are broad comparisons of assets, incomes and interest payments that don’t take into account any sort of composition. The Unconventional Economist has previously done some work in this area which clearly shows that older cohort owns more of the assets, while the younger owns the debt. It is important to keep that in mind when analysing this data.

To the data then….

Firstly total debt to asset ratio.

Most notably you can see the effect of the GFC where asset values fell before the re-ignition of credit via stimulus. You can also see that the ratio is now higher than it was before the GFC and continues to climb. I expect this to get worse in the next data release as housing prices continue to slide.

The housing debt to asset ratio data already clearly displays this trend.

This data also brings up something I have mentioned previously a number of times. You can see in the post-GFC period that the debt to asset ratio was actually falling at a time when large amounts of high LVR debt issuance was occurring. This is because the rate of credit issuance was supporting the value of the underlying assets. Now that the rate of issuance has fallen the value of the assets have also fallen. This clearly shows the asset value-debt dependency that can be so dangerous to an economy after a credit boom because it can quickly lead to negative equity for new entrants.

The asset to income data tells a similar story, with financial assets relatively flat but housing falling. It must be noted that this data is preceding the latest stock market turmoil.

Finally we have interest payments to disposable income which clearly show the effects of interest rates on top of the long term trend of debt growth.

So, it seems that every chart based on the B21 data is heading in the wrong direction. Debt in proportion to assets continues to grow even at a time of strong wage growth, while housing asset values fall on the back of slowing credit growth. Under the current circumstances I cannot see either of these trends changing any time soon, in fact given the current economic turmoil across the globe I expect them to accelerate.

The big question now is if and/or when we will see some counter-action from the RBA to reverse these trends. I’m not holding my breath on that one.

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  1. Nice work!

    As much as the finance-housing complex like to keep telling people that there is nothing to fear because disposable income and employment are holding up, that debt albatross is starting to develop a nasty odour.

    Even if they are meeting their debt payments people are no longer so sanguine about their debt as a multiple of their income.

    It is one thing to say higher debt makes people more sensitive to interest rates movements.

    I think it is more accurate to say it just makes them more sensitive generally whether or not interest rates actually move.

    All these international gyrations is inducing a lot of twitchy behaviour among the heavily indebted even while they keep their jobs and interest rates remain stable

      • Yes about as stable as one hand one finger typing!

        I should have put inverted comma’s around keep and stable but typing on an ipad on a speeding Parra-City express standing in the vestibule area is a challenge.

        I completely agree that going forward international gyrations may be the least of the things producing twitchy behaviour in those carrying debt many multiplies of their disposable income (Note: not the Joye measure).

  2. Reposting my comments: Is NAB admitting that the credit-binge led “Wealth Effect” is dead and buried?
    A CUT in official cash rates might not succeed in jump-starting the economy, according to National Australia Bank’s chief executive.
    Cameron Clyne said yesterday that, with households already made jittery by the swings on global markets, any emergency interest rate cut was likely to cause even more money to flow into savings.
    ”The view is that if you reduce rates, you stimulate demand, but it may not. It may stimulate saving.”

  3. Jumping Jack Flash

    Everyone is just sick of debt. Debt is an anvil not a balloon these days.

    Debt is fun if you can repay it in a few years or if wages are inflating above the cost of living plus interest.

    Attention spans are short. A new house is only new for about 3 years. Maybe 5 if you’re renovating. The debt goes on far longer than that though. It becomes a drag. Many begin to wonder why they are giving 60% of household income to the bank each week.

    And if wages are stagnant or falling relative to cost of living plus interest then debt is no fun. Nobody wants it.

    We are seeing a definite change in sentiment surrounding debt. Banks will have a hard time pushing their debt until the next generation grows up and is ready to make the same mistakes in another 20 years or thereabouts.

    The banks need an advertising campaign around the joys of home ownership, and another campaign around ‘love your purchase and don’t give up on repaying that debt’. I can see it now… ‘ignore that slowly increasing mould spot on the bedroom ceiling, your house is awesome.’


    ‘Don’t worry about the sloping floors and that you have nothing left to fix them with, the kids will enjoy rolling things down them so you can save money on toys’.

  4. Meanwhile, Johny Chancellor is doing his best to pump up some bids at The Block:
    “But only a few have asked to check the depreciation reports for the four homes.
    It’s the goldmine for investors seeking to maximise the returns on their likely $800,000 plus outlay when the four newly renovated fully furnished houses go to weekend auction.”

    • I like the comment that seems to point out that the properties are unlikely to even break even.

      “The four houses would need to fetch close to $1 million to break even, given the $3.6 million initial purchase, plus other costs, but the television series is content to make its money from big advertising revenues.”

      So what about those property investors who don’t have TV advertising revenues to subsidise their loss-making renovations?

      • Mate, dont give the property investors ideas like that – they might stick a billboard outside on my rental’s balcony.

        • I’m hoping that if the owners of the house I rent haven’t figured it out yet, they won’t for a while!