150 Per Cent

Welcome back for the year – 2014 is going to be a great one!

However, before everyone jumps to conclusions, this article is not a ‘pump up’ telling everyone they have to give 150 per cent this year, although that would no doubt yield excellent results for all concerned. It is instead a look at the often touted warning that Australians are overleveraged and our housing market is in danger; with household debt to disposable income sitting at around 150 per cent.

When people talk about percentages, anything over 100 is often seen as hyperbolic or, in this instance, alarming, probably because it is above 100. Australia has one of the highest household debt to disposable income levels in the world, cementing this alarm.

Before everyone starts panicking, though, they should look closely at the numbers. When they do, they’ll find the real surprise is that the percentage is not higher.

The increase in household debt levels since the late 1980s from roughly 50 per cent to its current zenith was primarily caused by a sharp decline in interest rates combined with banking deregulation.

So let’s put this in perspective: household debt of 150 per cent of disposable income means that a couple with $60,000 in disposable income takes on a mortgage of $90,000 (ignoring all other household debt). Typically, mortgages run for 25 or 30 years, so why isn’t it so much higher than 1.5 years of disposable income? Based on current median prices, a figure closer to 1,000 per cent would seem more realistic, wouldn’t it?

The main reason this figure is so low is that so many homes have no debt against them at all. The figure used to be around half of homes, and today it’s still more than a third nationally.

In light of the fact that most household debt is secured against housing, the Reserve Bank remains comfortable with Australia’s current debt levels.

The key indicator for alarm should then be ‘non-performing’ loans and the percentage of income which is spent on housing – that recently has fallen sharply with lower interest rates. The chief way to manage these factors is to maintain prudent lending standards – unlike in the US with its subprime loans or even the UK and Euro nations, where it was far too easy to get 100 per cent mortgages.

Looking at the number of non-performing loans across major lending institutions, Australia is still sitting comfortably below 2 per cent of loans classified as ‘non-performing’, less than half the level in the US (which peaked at around 7 per cent in 2009), a third of the UK level and almost a quarter of the Euro area.

The Australian housing market remains well balanced, responding to interest rate changes and solid demand.

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