Household debt has Australians living in house of cards
18 NOVEMBER 2019
When it comes to household debt, Australians are world record holders.
- Australian household debt is close to 200 per cent of income
- Most of that is tied up in mortgages
- Commonwealth Bank CEO Matt Comyn says despite the debt, there is no need for concern while interest rates remain low
“We’ve got household debt to income on just a touch under 200 per cent, and that in my view is a massive macro risk,” Gerard Minack, economist and principal at Minack Associates, told 7.30.
“Why are Australians so in debt? Because we went out and bought houses.
“Not built houses, went out and bought them and pushed the prices up to among the most expensive in the world.
“It is literally a house of cards.”
He has his fingers crossed that we do not head into recession in the next 10 years.
The million-dollar mortgage
Steve and Bev Jones live on Sydney’s north shore, less than 10 kilometres from downtown Sydney.
They have three children and while they do not regard themselves as “well off”, they are happy to admit they are comfortable.
It is their mortgage that sets them apart.
“We have about a $1 million mortgage,” Ms Jones told 7.30.
“We went into it eyes wide open, knowing what we were taking on.
“It’s not great, but we wanted to own our own home, so it is what it is.”
While Mr Jones works full-time in finance, Ms Jones runs a consultancy part-time from home.
When she had her youngest child, who is now 14 months old, she did not take any time off work
“I worked all the way through my pregnancy and then I worked every day thereafter so I didn’t take a break,” she said.
“I think it would be very hard having to go back to a normal part-time or full-time job. And I think that would be difficult for our family to do that.
“But I’m not going to lose the house over going back to work full-time or part-time or whatever.”
They have about 25 years left on their mortgage but they are trying to pay it off faster than that.
The decision they made has been all about spending time with their children as they grow up.
They moved close to the city to reduce commuting time — and that has meant higher house prices and the mortgage that comes with it.
“I think we still make a lot of choices. It’s not like we can afford everything,” Ms Jones said.
“We still need to have choice but I feel like we can have the things in life we want to have for our children and for our family and we have a way of funding that.”
Passing on the rate cuts
The head of Australia’s biggest bank, the Commonwealth Bank, accepts that Australia’s household debt is high, but he is not too worried by it.
“We’re seeing an average loan-to-value ratio of about 50 per cent,” Matt Comyn told 7.30.
That means that loans are on average half the estimated value of the property.
From the bank’s point of view that means that if the borrower can’t repay, the bank can still sell the house and recover its money.
“So we don’t have any concerns in the context of the overall health of that debt and the customers being able to repay that,” Mr Comyn said.
“If you look at serviceability of that debt, both at an individual level as well as the overall system, we’re seeing more than three quarters of our customers are well ahead of their repayments.
“Obviously that’s contingent on interest rates remaining low, which I think under any scenario, interest rates are going to remain very low for the foreseeable future.”
Some argue rates would be even lower if the banks passed on official RBA interest rate cuts in full.
The last 15 changes to the RBA cash rate have all been cuts, and it now sits at a record low of 0.75 per cent.
But there is a growing gap between the average bank mortgage rate and the official cash rate.
Since 2006 the difference between the standard variable rate offered by the major banks and the cash rate has increased from just under 2 per cent to close to 4 per cent.
The Government has accused the banks of profiteering and appointed the Competition and Consumer Commission (ACCC) to investigate.
But Mr Comyn insists the story is more complex than it appears and he is looking forward to using the ACCC inquiry to get that message out.
He said the official cash rate was not the source of all the money the bank lends, but rather it accessed it from many different places including deposits and overseas money markets.
And he pointed out banks also have depositors, many of whom rely on income from term deposits, which are also affected by interest rate cuts.
“Where the cash rate’s fallen by 75 basis points, term deposits have only come down about 20 basis points,” Mr Comyn said.
“So for us, it’s all about trying to balance various stakeholder groups.”
‘Better hope we don’t have another recession’
So with household debt already at record levels, and already-high house prices looking like they are about to head north again, what is the solution?
“Ultimately, now, the best way is a slow and steady decline in house prices relative to income,” Mr Minack said.
“I guess a benign scenario would be perhaps small little corrections, not unlike what we’ve had.
“I think we would be pretty lucky to get away with that, because these house prices are now at such a high level.
“So you better have your fingers crossed and hope we don’t have another recession for the next 10 years because that’s how long it’s going to take.
“If we do have a recession in that interim period, wow, housing is really a risk.”
Watch Alan Kohler’s four-part special on the economy on 7.30, Monday to Thursday this week.