From Westpac today comes a fascinating new report (below), which supports MacroBusiness’ view that the run-down in savings and increased borrowings over the 1990s and 2000s was an anomaly that is unlikely to be repeated, and that higher savings rates and disleveraging are the “new normal”.
The key points of the report are as follows:
In the past 25 years, Australian households have experienced a dramatic change in conditions. Interest rates and unemployment fell materially and remained low;all the while, financial innovation boomed.
This facilitated significant changes in consumer spending, saving and investing behaviour.
The 1990s saw households save little and increase their leverage substantially as household net worth surged.
The tech bust and GFC resulted in Australian consumers taking a hard look at their finances, but they are yet to deleverage in aggregate. To date, the leverage taken on by first home buyers and (at the margin) upgraders has offset reductions made by existing borrowers.
The rise in the savings rate of the latter group points to leveraged households building an immediate buffer against a cyclical shock (likely via mortgage offset accounts).
In tandem with our Westpac–MI Consumer Sentiment survey, information from the Financial Accounts indicates that consumers are unlikely to unwind this buffer soon. Indeed, adverse conditions may see it rise further.
The report includes some interesting commentary on the run-up in housing debt and the primary drivers:
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In the past 25 years, Australian households have experienced a dramatic change in conditions. Over the three and a half years to September 1993, the standard variable mortgage rate almost halved to 8.75% as inflation pressures abated; it subsequently averaged 7.8% prior to the GFC rate-cut cycle. During those 15 years, the unemployment rate also declined by almost 7ppts to 4% as 3.2 million jobs were added, 62% of which were full time.
Over this period, banks increasingly favoured housing. Mortgage debt’s outperformance in the 1990s recession, weak corporate credit demand thereafter, and mortgages’ favourable risk weighting under Basel I all supported a 16ppt increase in housing loans’ share of total bank lending, to 46% by 1995, and 58% by 2010…
Given the favourable environment, it is little wonder that Australian households took advantage of the growing availability of debt. The increased use of debt was primarily focused on housing. Lower inflation brought with it expectations of lower interest rates, while the strong employment outcomes noted above gave households greater confidence in their ability to service and pay down debt. Strong gains for asset prices (property and shares) gave owner-occupier activity an additional boost, and also enticed investors…
Coupled with growing confidence in the broad economic outlook, households’ greater security in their own long-term personal finances gave Australian households the assurance necessary to bring forward investment and consumption by borrowing.
…what we can conclude is that the 1990s and 2000s saw a significant increase in household leverage, with the rate of growth relative to income tapering a little in 2004, then stabilising in the wake of the GFC.
Westpac also contends that savings rates would have been much lower were it not for compulsory superannuation:
While superannuation had been around for decades, the decade to 2003 saw the introduction and subsequent development (the increase in the contribution rate from 4% to 9%) of the compulsory super system…
It is striking that, when we subtract employer superannuation and workers compensation contributions from net savings, the net savings rate spends close to 20 years below zero.
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While credit growth has stopped growing strongly, Australians haven’t really begun to deleverage, with the growth in housing credit more or less offsetting falls in personal credit:
While there has been much talk of deleveraging post GFC, relative to household disposable income, Australian households have really only stopped leveraging in aggregate. Debt for owneroccupied housing has continued to increase at a marginal rate, offset by a modest fall in personal and investor lending. By household type, it is apparent that the leverage taken up by first home buyers and upgraders since the GFC has been largely offset by repayments made by already mortgaged households.
Another way to highlight the absence of aggregate deleveraging in the Australian experience is to contrast it to the US: there, household debt relative to income has declined for going on five years. The divergence between the Australian and US experience has principally come about owing to the strength of the Australian labour market and banking system as well as the impact of forced deleveraging in the US (loan defaults).
One wonders whether Australian might be forced to deleverage in the event that the mining boom unwinds in a disorderly manner?
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Finally, Westpac sees increased savings and lower credit growth as the “new normal” going forward, with concerns around the post-mining economy and lingering global uncertainties likely to stymie consumers’ behaviour:
Overall, it is clear that leveraged households have sought to build a buffer against existing liabilities in addition to super. However, this has not resulted in material deleveraging as the relative strength of the Australian economy has supported new borrowers entering the housing market. Leveraged consumers are willing to boost consumption sporadically, but they also remain susceptible to shocks. Given the uncertainty around the domestic economy post mining investment boom and the lingering global uncertanties, persistent strength in consumption seems unlikely until a more certain, positive outlook is in view.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
