Australia’s shriveling mortgage repayment burden

The Reserve Bank of Australia (RBA) has released household debt data for the September quarter of 2020, which reveals that the ratio of household debt to disposable income fell to 179.9% from 182.6% in the June quarter:

Within this figure, the ratio of mortgage debt to household disposable income fell to 138.0% in September from 139.5% in the June quarter.

More importantly, the ratio of household interest payments to household disposable income fell to 6.3%. This is the lowest recorded level since September 1999 and less than half the December 2008 peak of 13.3%:

In a similar vein, the ratio of mortgage interest payments to household disposable income fell to only 5.2%, which is the lowest figure since June 2002 and less than half the December 2008 peak of 10.6%.

Separate data from the Bank for International Settlements also shows that household debt repayments (i.e. both principal and interest) fell to 14.2% of disposable income in the June quarter of 2020, the lowest recorded level since September 2004:

The reason for the cratering debt repayment burden is obvious: average mortgage rates have fallen to all-time lows, namely 3.65% variable and 2.20% 3-year fixed:

Expect the debt repayment burden to fall further as borrowers pivot to fixed rate mortgages. Those rates are way too low to ignore.

Unconventional Economist

Comments

      • Jumping jack flash

        This.

        Probably would only need one every decade. But it depends on the debt growth rate. If it is sufficiently high the debt machine becomes self sustaining and there’s a lot of things we wouldn’t need that have been introduced only because of the need for debt growth.

    • Its actually the opposite.
      From the 2014-2017 bull run in prices debt to income rates were going up.
      The reason being is because if you have to pay more for your mortgage you need that return back in prices appreciation.
      When rates drop there is less pressure to get a return from house price appreciation.

  1. RBA credit aggregates show mortgage debt growing at 3% so presumably household income growing faster? Does household income include all forms of income incl. sharemarket returns and jobkeeper? Curious to know.

    • Jumping jack flash

      Its probably too early to tell but it is highly unlikely there has been any income growth to speak of. The latest debt is most likely due to leveraged coronavirus stimulus.

      The ideal scenario is that this debt growth allows price rises which then allows wage increases. And after that if everything is still correct, the debt engine becomes self sustaining and we get debt growth from the wages growth, rising prices, rising wages, and rising debt in turn.

  2. So took a look at it and mortgage debt grew by 0.7% in the June quarter. Household income would have needed to grow 2.2% in the quarter to produce that result. Definitely due to temporary Covid measures. Might see something similar in the September quarter but that is going to be a temporary deleveraging blip I suspect once the stimulus measures run their course.

  3. Very strange, in my area in the time in Perth just after most restrictions were removed the fill in units being built on bulldozed older blocks were snapped up quickly. Now there’s a 2 left in the area with the for sale sign up for some time. Dont seem to be moving.

  4. The fed broke it. Now, they own it.MEMBER

    I bought my house in Northcote (3070) in 1998 for $250K which was slightly above the median house price for Melbourne at the time. At the same time, interest rates were about 6.5% and nominal IT incomes are the same today as they were then. I have my payslips and employment contracts to prove it. IT contractor rates are lower today in nominal terms and probably half in real terms. Those charts don’t describe what has actually occurred.

    • MountainGuinMEMBER

      Hi Fed, interesting. The IT sector seems to have been one that sought huge numbers of visa workers, so I’m not sure if IT contractor rates are reflective of average wages, but they sure illustrate how wage stagnation has hit the sector, esp in an era where IT demand significantly increased

    • Jumping jack flash

      Im earning about 15% less income than what i was in 2012 when i was eligible for $250k. I’m now eligible for $420K. The magic of interest rates i guess.

      They still need to do something about the ponzi buy-in, ahem, deposit, because that’s the killer. 5% of $420k is a lot harder to save than 5% of $250k, especially after 8 years of cost of living inflation.

    • Given the banks are giving a 3 year fixed far below variable rate, they would seem to think rates are headed further down rather than up. They may or may not be correct, but I bet they are a lot better at predicting these things than most.

      • Or this time around banks have no choice but to offer lower rates and avoid defaults which will force them to reveal just how bad their loan books are.

        • Arthur Schopenhauer

          What is the comparison rate of a fixed mortgage? A few months ago, it was still better to negotiate a 2.5 ~ 2.7% variable rate, than move to a 1.99% fixed rate.

          (There were a bunch of fees and charges on the fixed rate mortgage offers.)

          • Fun fact, the comparison rate is based on a loan for $150,000, and as such a low interest rate high fee loans look worse than they really are for loans larger than that. How many people take out a loan that size or smaller? Did the banks have anything to do with creating this “standard” that makes loans charging higher interest rates look comparatively better?

    • They want people to fix to lock in their loan book for the next 2-3 years. No additional payments allowed on a fixed loan, so principal can’t be paid off, preventing debt deflation.

      • Many fixed rate products allow a limited additional payments (ING offers a 4-year fixed rate at 2.09% (or 1.99% fixed when split with variable) and a max $10K additional payment per year). No offset or redraw on the fixed component though.

        If you have good cash-flow and discipline, it works out better just to put all your money in an offset on a variable loan.

        • If you have good cash-flow and discipline, it works out better just to put all your money in an offset on a variable loan.

          Why not just take a shorter loan at the lower rate thus the payments you want to make anyway with less interest?

          • Typically there is no offset facility available on fixed rate mortgages.

            There’s no difference between keeping a chunk of money in an offset or putting that same chunk of money onto the loan as long as you keep the same repayments. It just comes down to cash-flow – i.e. if you might want to access it or lock it away in the mortgage.

            If, however, you refinance at a lower repayment rate based on the balance of the loan after you’ve paid that same chunk of money, you actually end up paying more in interest over the life of the loan.

          • Except you get lower interest rates if you lock the money into fixed loan, with a loan term that suits your desired payment amount, at least at the moment, at the cost of not being able to get it back out.

  5. Display NameMEMBER

    A few trillion of super yet to hit house prices, then we can explore 50-60 year mortgages, and finally tax deductible mortgage payments. Australian Innovation…

    • Totes BeWokeMEMBER

      I agree. We’re not getting one while the pin-up of the Labor party, Plibersek, is worth $9m, and went to the election with nothing but tokenism.

      Where was Labor’s demands for far higher taxes on the rich, an humongous resource tax, an end to tax rorts like trusts? Where was the opposition to immigration?

      I’ll tell you where Labor were. Right at the front of the trough.

      Australia can’t be fixed until Labor are gone.

      The workers party is now the anti worker, WOKERS party acting for the elites.

      • Display NameMEMBER

        And the LNP. The current set of LNP corrupt, religious nutters are poison for the interests of the country or the average tax payer. The only solution is independents or tear the whole system down, a solution that would be very messy.

        • Totes BeWokeMEMBER

          Correct. COMPLIANT Independents to replace as many as we can. Tearing it down is infinitely harder and is just a dream..

          Stop immigration and everything else has to fall into line for the country to function. It is 100% essential to fixing Australia. Ignore it, and there is no reform, a corrupt country, and we’re completely doomed.

          • Jumping jack flash

            “Stop immigration and everything else has to fall into line for the country to function”
            No, immigration is a symptom of an insufficient debt growth rate. Fix the debt growth rate and then we can stop immigration, but not before otherwise we will have a recession and depression due to the inherent deflationary nonproductive debt our economy depends on.

          • Totes BeWokeMEMBER

            Yes, I can see that it would be painful, Australians would have to work harder, and live on less, but man, not stopping immigration will be ffffaaaaarrrr more painful down the track. What we’re doing is the ULTIMATE dumb can kick that will rip this country to pieces in our kids lifetime.

            “Fix the debt growth rate”…do you mean stop debt growth being a function of our economy?

          • lols, the independents won’t be compliant, They will be wealthy people in it for themselves like every other parliamentarian, ie clive palmer. No one working for average wages can afford the time or money involved in a serious run for parliament. It is by design. The system is broken, not the ALP.

          • Totes BeWokeMEMBER

            bjw678

            Every election, there are dozens of people to choose from in every electorate. They are not all rich.

            Vet them, and vote in a coordinated way to get them elected.

          • How do you propose to vet candidates with no policies, no media presence and no public profile, let alone get the masses to vote in a coordinated way?
            Please present examples for who you would have picked from several seats last election and why, or I will continue to believe you are a deluded fool with no practical and sensible ideas to offer at all.

          • Totes BeWokeMEMBER

            bjw678

            I’ve spelled it out enough times.

            You are resistant to change because you love the dirty Labor party, and are happy with immigration.

            Stop being a combative clown. If you want a debate, I’ll debate you. If you want to continually abuse me, I’m not interested.

          • If YOU can’t even be bothered, and this is YOUR PLAN TO SAVE AUSTRALIA, then how is any body else going to be remotely bothered…

          • Totes BeWokeMEMBER

            It’s not that I can’t be bothered. I know who I’m talking to, and know you’re an ignorant wokester that can’t listen to reason.

            Your base case is getting Labor and Greens to run the country. That’s not good for Australia.

      • Arthur Schopenhauer

        Politician from the age of 28. Married to a convicted heroin dealer. (Coutts-Trotter served almost three years of a nine-year prison sentence after being convicted for the importation and distribution of heroin into Australia in 1986.)

        • Totes BeWokeMEMBER

          “Married to a convicted heroin dealer”

          Who leads a government department. I thought a requirement was no criminal past. It’s beyond a scandal.

        • Totes BeWokeMEMBER

          Not random. Independent candidate commits to ending immigration, they’re endorsed, everyone interested in saving our country shares it via social media, and we give them a term to do it, or they’re out.

          Zero supply to LNP or Labor government until immigration is addressed as per what the electorate wants.

          • How many times does it need to be explained to you totes, Endorsed is what candidates for the labor party are. You are creating the independents party, an oxymoron, from a moron?

          • Totes BeWokeMEMBER

            If they’re not going to block supply until immigration is ceased they don’t get endorsement.

            SEE THE DIFFERENCE?

            You calling me a moron? Man I encounter some, but mate, look in the mirror.

            Like I siad. I know what you are and what you want. You’re biased, and getting desperate because Australians are finally waking up to what Labor are and want them gone.

          • So they don’t do what you say, you kick them out of the party? Just like lib/lab who remove their endorsement as well?
            Except they aren’t in a party? Unless you have the money/power/influence to run a successful party in it’s own right your “endorsement” is completely meaningless. This is why the endorsement of the lib/lab parties is valued to the point that people comply with their directives. See peter garrets change of heart while in the ALP.
            Do you even understand anything about the process?

          • Totes BeWokeMEMBER

            ….”So they don’t do what you say, you kick them out of the party?”…

            It’s not a party. It’s a criteria they MUST meet. Not what I say. If they fail to uphold their side of the deal (deny government supply until immigration is ceased), they’re out. Pretty simple stuff.

            …..”Unless you have the money/power/influence to run a successful party in it’s own right your “endorsement” is completely meaningless”….

            World’s changed. Everything has been disrupted with technology, and it’s time the dirty Labor party, that act counter to Australia’s interests were disrupted too.

            Your argument and spirit are floundering. You know this is possible, I can smell it.

      • Where was Labor’s demands for far higher taxes on the rich, an humongous resource tax, an end to tax rorts like trusts?

        LOL.

        Just a couple of days ago you were telling me those were policies Labor took to the last election.

  6. Jumping jack flash

    Looking at those charts and comparing to the period around 2006 i don’t believe the debt is growing fast enough yet. Its a good start though.

    We probably need more stimulus to get turned into debt yet. Perhaps if one or more of the virus cures is a bust?

    However, the $20k super withdrawals will come online very soon (banks dont care where money comes from before 6 months ago) and if I’m correct then we will see a massive jump in debt leading up to March and maybe a little bit longer.

    Hopefully that leap in debt occurs, and if it does hopefully it will be large enough to kick over and restart the debt engine: bring back some price inflation, and then wage inflation, and then more debt. In that order.

  7. This is bearish indicator for prices.
    As debt repayments to income ratio drops, house prices usually drop.
    There is less pressure on people to make a profit from house price appreciation because they get the savings from a reduced payment. This is also at a time when wages are suppressed or even reduced so your borrowing capacity is reduced or remains flat.

    From 2000-2008 the debt repayments to incomes exploded causing house prices to sky rocket before the crash.
    A smaller but noticeable thing happened between 2013 – 2017/18

    over a period of 5+ years the savings from the low rates will eventually fuel another cycle but for the time being its downward pressure

    • I think you have cause and effect a bit backwards there. Property prices exploded leading to higher debt repayment to income ratios seems like a far more logical chain of events. Currently house prices have eased a bit along with reduction of interest rates, so repayment to income dropped. A quick burst of price increases as is happening should fix that though.

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