The Reserve Bank’s latest Financial Stability Review (FSR) warned of growing risks in the Australian apartment market.
The RBA said that the actions that Australia’s banking regulator, APRA, had undertaken since 2014 to create this growing risk had resulted, however, in a net positive impact because in locking down growth rates for investment lending and slowing house price appreciation APRA had “generally enhanced resilience in the household sector”.
But in no small measure the enhanced resilience in the household sector needs to be judged against the growth of debt in Australia which has taken total debt to income ratios to a new all-time high of 161% as at the end of the December quarter 2015.
That leaves Australia in the top tier of household indebtedness globally.
The RBA said that “gross debt-to-income ratio continues to rise from already high levels as households take on more housing debt and income growth has slowed”.
More worryingly however, the RBA showed that for households which actually have a mortgage the ratio across Australia’s states is closer to 300% and has increased materially over the past decade.
“With incomes growing more slowly in the past few years compared with the previous decade, households may not be able to rely as much on future income growth to reduce debt-servicing burdens,” the RBA said in the FSR.
That, and the growing level of household debt suggests that at some point in the future Australian households will need to reduce consumption in order to focus on debt reduction. It’s the concern I expressed last week that Australia’s economic transition may be built on sand.
But there was also a chart in the RBA’s FSR which suggested Australians recognise there are risks in their borrowing – they are actually actively increasing their savings in mortgage offset accounts.
Certainly net debt is also rising and has itself reached a new high of net debt to income ratio of 152%. But this ratio reflects the average of all households, including those who don’t hold debt, or a mortgage, across Australia. Given that mortgage offset accounts are likely to only be held by those households that do in fact hold a mortgage, those with the close to 300% average debt to income ratio, then there is likely to be a significant reduction in this ratio, gross to net, over and above the 5.5% reduction across all households in the economy.
Even though both total debt to income and net debt to income are both rising, the increase in net debt is coming on at a slower rate than total debt.
This may sound complicated, but what it really means is that the buffer mortgage holders have in their offset accounts is growing.
Certainly Australian households are still carrying a heavy debt burden by developed market standards, but there are signs that they recognise that and are taking steps to actively reduce their risk.