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Saturday, 29 June 2019

Household debt ratios revised lower (again)

Debt ratios down again

Household debt to disposable income ratios were revised a little lower again this quarter, according to the latest RBA statistical tables. 

Ergo, household debt still remained below 1.9x disposable income as at March 2019. 

In fact, the revised ratio was steady at a nick below 1.9x for the fourth consecutive quarter. 

1½ years ago now there were heaps of excitable articles doing the rounds about the (presumably psychological) significance of household debt hitting 200 per cent of disposable income - some even wrote about the ratio hitting 300 per cent, for reasons that weren't entirely well thought through.

But in any event those figures were subsequently revised down and today sit well below 200 per cent. 

Net of offset accounts the ratio is materially lower than 1.9x, and net of deposits the ratio is broadly unchanged in 15 years. 

Of course debt serviceability has improved markedly as interest rates have declined. 

Looking forward the debt ratio will likely decline as overpriced interest-only loans are switched across to cheaper P&I loans, and as tax and interest rate cuts free up household cashflows while allowing nominal wages growth to recover. 

Rates down

Bond yields continued their multi-year declines in June; even the 15-year is tracking at around 1.5 per cent, which shows just how much low interest rate expectations have become embedded. 

Mortgage rates are now available from 2.99 per cent, so it shouldn't be too surprising that housing debt is higher than when mortgage rates were running close to double-digit levels (as they were as recently as July 2008). 

Further rate cuts may not be passed on in full by lenders.

But one thing that shouldn't be overlooked is that - despite recent attempts to besmirch the role of mortgage brokers - borrowers are becoming ever-better informed. 

The marketplace does not not lie: in the first quarter of 2019 a record 59.7 per cent of loans were settled by brokers, a figure which might be expected to rise to ¾ of loans over the next half-decade. 

I wrote about 10 of the ways in which debt ratios can come down here