Australian Household Finances
In August 2017, the Household, Income and Labor Dynamics in Australia Survey revealed that while home owners have seen significant growth in property values in the past decade, mortgage debt for home owners aged under 40 has doubled.
Why do you think it’s important to investigate Australia’s household leverage?
First, taking a closer look at the data, 69% of today’s Australian debt relates to households. On top of that, Australia’s household-debt to income ratio currently stands at about two-to-one, meaning we are in debt one dollar for every dollar that we earn.
However, there is another perspective to consider: debt to asset-value ratio. This ratio is deliberately lower, standing at about 26.4%. This means that even though we are saying our household-debt is two-for-one, the value of our assets is 26.4x the debt. This is a good thing and is a bit contradictory to the belief that Australia is heavily leveraged.
Although, we do have to remember that asset value is very likely to fluctuate, with households in Sydney and Melbourne almost doubling their asset value in the past eight to nine years. On the other hand, debt is less likely to reduce, which will have an impact on this ratio. Looking at the data, we can say Australia is heavily leveraged, which is still okay. This could quickly change, however, if we see pressure on the asset value.
Q: So, what is next? What does this mean for Australia?
L.C.: We can expect more focus on debt-reduction from policy makers and regulators. In the past few years they have already focused on reducing LVR loans and interest-only lending and I assume this is a trend that will continue.
Finally, all household debt, and the last component of it being mortgage debt, needs to be managed very carefully. When borrowers want to pay off their mortgage debts, this will decrease other expenditures which drive the broader economy, such as hospitality and retail. We need to be aware of this.
Whether you’re a borrower or a lender, expect to see continuous scrutiny, expect to pay a greater deposit and expect to be able to show a healthier servicing ability.
So, what should we be doing? While rates are low – we should be reducing owner occupied debts and getting ahead while we can. Look at fixing rates for the longer term and really increasing our equity.
This has a two-pronged outcome. Less debt – less pressure and a bit of a safety net for time ahead. More equity – so that in the future you will be well placed to look at investment and getting your money working hard for you.
Contact Donna-lee on 0418903954 or donna-lee@celsiusfinance.com.au – should you like a health check on your current facilities or to see what you maybe able to afford or plan for future investment.