Breathing space
Australia is experiencing a genuine demographic boom in its 25 to 34 year old cohort, largely due to the structure of its migration program.
And as more Baby Boomers elect to take some debt into their later years, in aggregate Australian household liabilities have increased, as one might expect in tune with lower interest rates.
Adjusted for incomes in Sydney and Melbourne median dwelling prices are about 20 per cent cheaper than their respective peaks of a couple of years ago, while no other capital city has seen any meaningful increase in real median dwelling prices over the past decade (although Hobart has got close to that point).
There had been a level of concern about the extensive use of interest-only ('IO') loans, but after a huge crackdown both the stock and flow of IO loans are now tracking at the lowest level on record as a share of the overall market.
A lot gets written about debt, but what's critical is the ability of households to service it, and there's no doubt that the forced IO reset has caused stress and arrears for some households, especially in Western Australia, the Northern Territory, and, to a somewhat lesser extent, Queensland.
On this front, some positive news: the ratio of both household and housing interest payments to income declined in the March 2019 quarter, and both ratios are now more than 31 per cent below their respective high watermarks of Q3 2008.
The good news is that thanks to an interest rate cut having been delivered in June combined with a dramatic year-on-year reduction in housing finance, these will ratios will decline further in Q2 2019.
Click to expand the chart:
Click to expand the chart:
For some interesting context, household interest payments accounted for a greater share of income 30 years ago in Q3 1989 than they do today in Q3 2019.
Inflation easing further
However, petrol prices are now falling, and annual inflation decelerated in May to the lowest level in two years at just 1.6 per cent.
Thus the rate of inflation is reportedly drifting further away from the target, which is typically a sign of an economy running well below its capacity.
Thus the rate of inflation is reportedly drifting further away from the target, which is typically a sign of an economy running well below its capacity.
While it's true that highly indebted households can repreent vulnerability from a financial stability perspective if conditions are allowed to deteriorate, measures have been introduced to prevent households from leveraging up today as they once could.
For those households that already had high debt, given the absence of inflation the best thing that fiscal and monetary policies can do is relieve pressure on them by getting the unemployment rate down towards 4 per cent and incomes rising.
Tax cuts to reverse years of bracket creep can help.
Tax cuts to reverse years of bracket creep can help.
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The commodity price index increased 13.4 per cent over the year to June in SDR terms, due to iron ore, gold, and beef and veal prices.
In Aussie dollar terms, the index was up by 19.4 per cent.
