Australian households hold a relatively large amount of debt compared to other developed nations, which has been considered a threat to financial stability by some. The lower-income households that are under debt, tend to have quite a lot of debt relative to their incomes, overall, adding potential stress to their pockets.
Though there are pockets of stress where the lower income groups had to take on a lot of debt to buy a home. The bulk of mortgage debt in Australia is held by higher-income households, who are best able to service the debts.
Reserve Bank of Australia (RBA) Assistant Governor Luci Ellis stated that higher-income households were not only likely to own their own house but also have other properties as investments.
“This is why we say that most of the mortgage debt in Australia has been borrowed by those most able to service it,” Ellis told a housing conference in Melbourne.
However, The Reserve Bank of Australia might want to call the debt counsellors soon to seek feedback on the health of the economy. Homeowners, consumers and property investors around Australia are making more calls to financial helplines as three warning signs back up the spike in demand:
- Mortgage arrears are creeping up,
- Lenders’ bad debt provisions have increased
- Personal insolvencies are near an all-time high.
There are more people who have got mortgages that they can’t afford to pay. Australia’s households are among the worlds most-indebted after being on more than $1 trillion of mortgages amid a housing boom that’s fizzled out in parts of the country, but still roaring in Sydney and Melbourne.
While most are capably servicing their debts, a worsening of credit metrics has seen executives and analysts take a more cautious tone. Australians’ private debt has soared to 187 per cent of their income, from about 70 per cent in the early 1990s, encouraged by low interest rates. While most households are managing these levels of debt, many feel they are closer to their borrowing capacity than they once were.
Knocking out the wind
“There’s so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it,” said Gareth Aird, economist at Commonwealth Bank of Australia, the nation’s largest lender.
While most borrowers in Sydney have plenty of equity in their homes as prices keep rising, that’s not the case elsewhere. In the mining state of Western Australia, which is struggling to cope with the end of an investment boom, more than 10 per cent of mortgage holders have little or no equity buffer, according to a Roy Morgan report last week. In South Australia and Queensland, 8 per cent and 7.2 per cent of borrowers respectively are in negative equity.
Lenders are watching these indicators as closely as the RBA. After a seven year bull-run, annual cash earnings at Australia’s big four banks fell last year for the first time since the financial crisis, said PricewaterhouseCoopers. At the same time, their bad debt expenses which encompass both business and consumer lending – jumped 39 per cent to $5.1 billion, the highest since 2012.
But the hardest indicator to track may be borrowers worried about making their next repayment. Counsellors at the National Debt Helpline deal with such problems and are now even getting calls from property investors. In the last quarter of 2016, phone calls to the service jumped 12 per cent on the previous year to an average 11,079 per month, that’s double the rate of increase of the same period a year earlier.
“Pockets of stress appear manageable in 2017 given the prevailing low interest rate environment,” Citigroup banking analyst Craig Williams said in a January report.