Household wealth falling but debt trap remains

By Cameron Kusher at CoreLogic:

The ABS data showed that at the end of the March quarter, household net worth was $10.243 trillion. CoreLogic research analyst Cameron Kusher observed that while a large figure, household wealth has now fallen for two consecutive quarters and is -0.7% lower year-on-year. The $10.243 trillion in net worth is madeup of $12.701 trillion in assets and $2.458 trillion in liabilities. The recent fall in the value of assets at a time in which liabilities have continued to rise has led to the fall in net worth.

The Reserve Bank (RBA) analyses this data to produce a number of valuable ratios, including: debt, assets and interest payments to household disposable income. Cameron Kusher said, “These ratios highlight the impact of high levels of debt at a time in which asset values have fallen but the debt has not fallen at the same pace.”

“We’ve seen the ratio of household debt to disposable income continue to climb over the quarter, reaching a new historic high of 189.7%. The rise in household debt relative to incomes has certainly slowed; however, it continues to edge higher.”

The ratio of housing debt to disposable income is recorded at 140.1% and was unchanged over the quarter. While it was unchanged over the quarter, it remains at an historic high level, highlighting that households remain very sensitive to the cost of mortgage debt.

Turning to the ratio of household assets to disposable income, it was recorded at 927.0% in March 2019. The ratio peaked at 961.7% in December 2017 and has trended lower since. The ratio of housing assets to disposable income peaked at 529.6% in December 2017 and as at March 2019; it was recorded at 483.5%.

The reduction in housing values has coincided with the period in which the ratio of household and housing assets has fallen which is no wonder when you consider housing accounts for around half of the value of household assets.

Cameron Kusher said it’s also important to consider is that while the value of assets are falling there has been no reduction in the ratios of debt to income which highlights that asset depreciation has been greater than debt reduction. As a result, the ratio of household debts to assets is at 20.5%, the highest it has been since December 2014 and the ratio of housing debt to assets is at 29.0%, the highest it has been since June 2013.

Cameron Kusher said, “Despite the lowest interest rates since the 1960s, the ratio of interest payments to disposable income has trended higher years. As at March 2019 the ratio was recorded at 9.1% and although it has been steady for three quarters, interest payments relative to disposable income has trended higher on an annual basis.”

Furthermore, the ratio of interest payments to disposable income was last this high in September 2013. It is a similar story for the ratio of housing interest payments to disposable income, which is also trending higher, recorded at 7.6%, which is the highest ratio since June 2013.

“With interest rates at generational lows there was perhaps, some expectation that households would use the low rates to pay off some debt however that has largely not occurred. With asset values recently falling the data shows that debt pay off has not been as rapid as the declines leading to a reduction in household wealth,” Cameron Kusher said.

This data is to March 2019 and by the end of June 2019, there were some tentative signs that the declines in dwelling values were starting to level. While this means that there is likely to be a further decline in household wealth over the June quarter, it also suggests there is unlikely to be a meaningful reduction in household debt levels. As such, household debt levels are likely to remain amongst the highest in the world. At the same time, the value of household assets remain substantially higher than the value of the debt. The cause for concern will be what happens if economic conditions deteriorate materially, leading to weaker labour market conditions and potentially creating some challenges around servicing such high levels of debt as unemployment rises.

Another medium to long-term consideration is a scenario where interest rates eventually start to rise. Households are generally able to service high levels of household debt while interest rates are at record lows, but eventually (probably not for at least several years) interest rates will rise. Cameron Kusher concluded by saying, “If household debt levels remain high relative to incomes under a higher interest rate environment, the result could be weakness in household spending (as households dedicate more of their income towards servicing their debt) and potentially higher levels of financial stress amongst heavily leveraged households.”

Comments

  1. What a joke: “net wealth”
    Is this real wealth like, um, liquid assets (treasury bonds, blue chip stocks etc) or ponzi wealth like property, which relies on the ‘greater fool’ theory (and the provision of credit to said greater fools)

    • Jumping jack flash

      The latter.
      They count debt as wealth now, donchaknow, conveniently ignoring the interest too.

      Banks don’t want to wave the interest aspect around too much in anyone’s face because that’s what actually makes spending nonproductive debt really very bad for an economy. Especially in an economy like the New Economy where if any spare capacity is accidentally created from debt spending, it is used to create more debt.

  2. The danger is not when 90% of the population is mildly over-indebted, it is when 15-20% of the population is acutely over-indebted. The above is in aggregate across the entire mortgage sector.

    Interest is only part of the debt burden, the other is the principal itself; eg 50% of Westpacs book was IO. It becomes obvious when you imagine that asset prices effectively doubled in the 2012-2017 period (Sydney/Melbourne), yet despite there only being 150 basis points of cuts and no real wage pressures across that same period, interest payments to incomes were flat.

    • The big deal is what this says about the credit cycle in regards to aggregate demand/consumption. We’re a consumer led economy, dependent upon credit expansion via house prices to fuel that consumption. It is in contraction at present, evidenced by:

      household wealth has now fallen for two consecutive quarters and is -0.7% lower year-on-year

      • Australian credit was growing by around $120b per year (over $100b of that mortgage debt) generating only about $25b to $30b GDP growth
        imagine GDP growth if new credit goes to zero or negative …
        if we start deleveraging (even by a tiny $10b per year over couple of years) or GDP will crash 20%

    • Jumping jack flash

      IO is the holy grail of the banks.
      If they completely ignore the risk – which they do – then IO is a great earner for the banks. A regular income stream that can be sold off as well.

  3. for most of people (bottom 90% or 95%) most of wealth is a paper wealth (either inaccessible super or bubble property equity)

    would be interesting to see statistics when it comes to real liquid and accessible wealth of Australians. My guess is that and average (median) Australian has very little of it (at the best 10% of his/hers huge real debt) and most would rely on CCs if “rainy days” come (until banks start canceling them).

  4. Australians have epic amounts of debt…debt levels that are becoming toxic for more and more people…literally poisoning their lives. With wages the way they are, the only way to support an increase in house prices is for more people to take on more of that poison.

    I hope that won’t happen. I suspect it won’t, but if it does it will be a tragedy for the country.

  5. Well we don’t have to worry about rates going up, that’s for sure. We’re in a perpetually low rate environment that will remain so while debt keeps growing. The relation is obvious and inverse – it’s not rocket science.

    • Jumping jack flash

      Ideally, as debt approaches infinity, interest rates approach 0, but they can never be 0 otherwise the banks will simply disappear.
      So interest payable on infinite debt must always be some tiny fraction of infinity, which is, of course, infinity.

      We’re up to 10 trillion debt dollars (or something very close to that) sloshing around in our economy. We’re pretty much at the lowest interest rates that we’re going to get (banks of course can get lower rates than us plebs. Us plebs are the ones who ultimately pay the interest, not the banks).

      But the important point is that the 10 trillion debt dollars generates interest, and that needs to be paid somehow.
      Of course, we could just say, “just use debt to repay the interest on the debt” but banks don’t like to be paid in debt, they know debt isn’t worth anything because debt has to be given back, plus interest.

      Banks want actual money to be paid to them as interest. That actual money is money that is earned through productive activities.

      The problem is that the 10 trillion debt dollars sloshing around in our economy hasn’t been used to increase production to cover the interest that’s required to be paid for it. Its just been used to buy trinkets and inflate house prices. That’s not productivity.

  6. We got rising debt to disposable income with a falling housing market and reduced credit growth (but still growing in dollar terms) on lower transaction volumes.
    You know what all this means….It means that a large amount of people who had more equity built up over the years has cashed out while a smaller number of new buyers have loaded up.

    This is also why your not seeing a drop in household stress despite lowering interest repayments. People are just simply taking the extra saving they get from a reduced rate and borrowing more.

  7. Jumping jack flash

    “The ABS data showed that at the end of the March quarter, household net worth was $10.243 trillion”

    Wow, that’s a lot of debt…
    how much interest is sucked out of the economy from that debt wad each week/month/year?

    • But money is debt. For the money to exist to be “sucked out” it has to be borrowed first. If debt was lower that money wouldn’t be there anyway to take. It’s all very confusing to the average person (myself included) but lower debts means less money to repay the debt remaining.

      Before doing economics I thought like most goods the price should go up for it (interest rates) when people are borrowing/want a lot of it and vice versa. Its interesting that practically its the inverse – in our modern economy debt seems to get cheaper the more people take on.

    • DominicMEMBER

      That’s household “net” worth i.e. total wealth less outstanding debt.

      However, the net wealth figure is basically useless because debt and the total wealth figure are not independent variables. In other words, if everyone in the country who had some debt attempted to pay down that debt (by selling the assets on which it was secured), the total wealth figure would decline by substantially more than the nominal amount of debt paid off, rendering the ‘net’ figure a complete croc. Bear in mind that the entire housing stock of the country is valued off a relatively small turnover of that stock e.g. when prices are rising the entire stock value is lifted by turnover of 4 or 5% of that stock. So, financial leverage allows those transactions to take place which then leverages the values of the other 95% of stock too. It’s like magic – so much ‘wealth’ so little work 😉

      By the same token a debt Jubilee wouldn’t help either as once enacted no one would be incentivised to lend anymore (banks would all be insolvent anyway) because of the risks involved, thereby making the property market ‘cash only’. Without debt available property prices would fall 85-90%. Maybe more

  8. nexus789MEMBER

    The only people with real ‘liquid’ wealth are the one or two percent at the top. The rest will be taken to the cleaners. Household wealth will prove to be a transitory phenomenon.

  9. SoMPLSBoyMEMBER

    The correct response to your banker exclaiming: ” Congratulations! Your $1.0 mil resi prop loan application has been approved” is to spew lunch, succumb to terror-induced incontinence and then pass out.

    However, the popular response by most is to clutch-hug all adjacent humans, become emotional ( squirt a few tears) and grab the bankers hand with ‘both’ hands and shake it like Latham as if they’ve just won the powerball.

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