Rising mortgage repayments bite Aussie households

The Bank for International Settlements (BIS) has released its global household debt statistics for the September quarter of 2021. This data shows that Australia still has the second highest stock of household debt in the world when measured against the size of its economy, as measured by Gross Domestic Product (GDP).

As shown in the table below, Australia’s household debt-to-GDP ratio was 119% in Q3 2021, second only to Switzerland (131%):

The next chart plots the time series across the Anglosphere, with Australia’s household debt load well ahead of Canada (109%), New Zealand (98%),  the United Kingdom (88%), the United States (79%), and Ireland (31%):

However, because mortgage rates fell so heavily over the pandemic, Australian household’s debt repayment burden – i.e. principal and interest repayments as a ratio of disposable income – has also fallen markedly; albeit remains well above the Anglosphere nations surveyed by the BIS:

The situation is also beginning to change. The next chart combines the BIS series with the RBA’s household/mortgage interest payment data:

The ratio of household interest repayments to income fell to 5.5% in September 2021, less than half the peak of 13.3% in December 2008:

In a similar vein, the ratio of mortgage debt interest payments to income fell to 4.6% in September 2021, less than half the peak of 10.6% in December 2008.

However, the green line in the above chart is interesting. It shows total household debt repayments (i.e. both principal and interest), which rose over the June and September quarters on the back of the sharp appreciation of house prices:

Basically, the rise in mortgage principal repayments due to higher house prices exceeded the fall in mortgage interest repayments due to declining rates.

The implication going forward should be obvious. Fixed rate mortgages have already risen quite sharply since the September quarter (see next chart) and variable mortgage rates are tipped to rise this year as the RBA lifts the cash rate.

RBA new mortgage rates

The upshot is that the share of household income going towards debt repayments are about to rise quite sharply, which will sap disposable income, restrict growth, and put strong downward pressure on housing prices.

I’ll upload a Macro Breakdown video later today explaining these dynamics in more detail.

Unconventional Economist

Comments

  1. – I am surprised to see that Ireland’s Debt-to-GDP has gone down so much since say 2007 / 2008. Did the irish economy “go ballistic” ? Or is this an “accounting error”. ? Any thoughts ?
    – Do you have any data about how much mortgages are “re-setting” from “Interest Only” to “Principal & Interest” e.g. this year ? This was an issue some 2 or 3 years ago.

      • Not sure, because since 2013 Irish house prices have gone ballistic again in Dublin, but that may not reflect other counties in Ireland which are probably still under water in terms of debt / equity ratios. Since the majority of the good jobs are in Dublin (in terms of pay).

        So I’d say what is happening in Dublin is probably not reflective of the rest of the country. So may be limiting their ability to lever up.

    • arescarti42MEMBER

      The Irish economy was decimated when their housing bubble burst during the GFC.

      Their bubble was one of the world worst at the time

  2. Camden HavenMEMBER

    Defending the dollar as reserve following debasement for decades means in my opinion, pulling on the interest rate lever really hard.

  3. Fishing72MEMBER

    So interest rates are going up for debt but not for deposits?

    Financial war against the population.

    • happy valleyMEMBER

      Look – Captain Phil has to look after his private bank boss mates and couldn’t give a RAT’s about savers and retirees trying to subsist on deposit interest.

  4. Display NameMEMBER

    Global wheat price to go up due to war, petrol going up. Inflation likely to be higher all year?
    RBA to redefine inflation to avoid putting rates up.

  5. Hill Billy 55MEMBER

    This is where the lies of the LNP hit the road. Over their lifetimes, households are net savers. The borrowers are business and Government. Low interest rates are not in the interest of households, they suit the LNP constituency of (particularly) BIG Business, and Government (which they see as their right).

    Once the interest rates are set at “normal” levels (about expected inflation plus 2%), and house prices adjust, we can get on with normal living. This debt binge economy is finished.