S&P Global Ratings has warned again on Australia’s record high household debt:
Household debt as a percentage of net household disposable income in Australia is high compared with many other Organization for Economic Cooperation and Development (OECD) countries (chart 8).
Australia’s household debt did not increase dramatically until interest rates and inflation reached low levels in the 1990s, improving consumer confidence (chart 9).
Most of the increase in household debt was used to buy assets, namely property. Chart 9 shows the increases in household debt as a proportion of household disposable income and housing debt as a proportion of household disposable income from 1998 to 2019. Falling interest rates have coincided with rising household debt, of which the majority is housing related.
While rising housing debt has occurred during a period of rising house prices, the elevated levels of household debt do not provide much headroom if the economy were to deteriorate or when interest rates start to rise again.
Gerard Minack, economist and principal at Minack Associates, raised similar concerns at the ABC:
“We’ve got household debt to income on just a touch under 200 per cent, and that in my view is a massive macro risk”…
“Why are Australians so in debt? Because we went out and bought houses.
“Not built houses, went out and bought them and pushed the prices up to among the most expensive in the world.
“It is literally a house of cards.”
He has his fingers crossed that we do not head into recession in the next 10 years…
“Ultimately, now, the best way is a slow and steady decline in house prices relative to income,” Mr Minack said.
“I guess a benign scenario would be perhaps small little corrections, not unlike what we’ve had.
“I think we would be pretty lucky to get away with that, because these house prices are now at such a high level.
“So you better have your fingers crossed and hope we don’t have another recession for the next 10 years because that’s how long it’s going to take.
“If we do have a recession in that interim period, wow, housing is really a risk.”
DFA’s independent household data shows that 32.2% of households with an owner-occupier mortgage – representing 1.8 million households – are experiencing mortgage stress and have little financial buffer to cope with a significant economic or financial shock:
And this comes despite interest rates hovering at all-time lows.
Therefore, a significant share of households are teetering on the brink and highly exposed to an economic downturn.
Arguably, the bigger concern is that Australia’s record debt load will curb spending and domestic demand – a problem explicitly acknowledged by the RBA:
The household debt-to-income ratio has risen to record levels in Australia in recent years, while household spending has been relatively weak (Figure 1)…
Australia has seen a strong increase in household debt and weak spending over recent years despite a persistently stable banking system and reasonable economic growth even during the GFC. This suggests that a high level of household debt may weigh on spending even when the economy is in a more ‘normal’ phase of the business cycle…
Consistent with international research, we find evidence that high levels of owner-occupier mortgage debt reduce household spending. Higher mortgage debt is associated with less spending even when we control for changes to net housing wealth and cash flow (adjusted for mortgage repayments). This implies that a deepening of both sides of the household balance sheet is associated with weaker spending, and that debt matters for spending over and above its effect on net wealth…
Overall, the negative effect of debt on spending is pervasive across households with owner occupier mortgage debt.
Basically, Australians have ‘borrowed from the future’ and our record high debt loads now present a giant millstone around the economy’s neck.