Home Ownership vs Household Indebtedness- Can You Afford It?

October 6, 2017

Over the past 5 years, the Australian Property Market has experienced substantial growth in property prices; particularly in the eastern states. This is largely attributable to a climate of low interest rates which has served to increase mortgage serviceability and allowing borrowers to take on more debt.

 

With household debt trending upwards, there a several issues that must be considered:

 

Is home ownership becoming increasingly out of reach? And more importantly

Are we taking on more debt than we can afford?

 

Earlier in the month the ABS released their biennial survey of Household Income and Wealth (2015-16) which offers some interesting insights into these issues.

 

According to the ABS website, several key findings were noted in relation to Household Debt and Over indebtedness in Australia [1]

  • In 2015-16, based on the ratio of debt to either income or assets, around three-in-ten households (29%) were classified as ‘over-indebted’.

  • Debt growth has outpaced that of incomes and assets during the same period, helping to drive the proportion of households who are over-indebted up from 21% in 2003-04 to 29% in 2015-16.

  • Owners with a mortgage were the most likely households to be over-indebted (47%) based on tenure type. Households with a reference person aged between 25-34 years (33%) and 35-44 years (34%) are among those most likely to be over-indebted based on age group. Of those households with a property debt, 62% of 25-34 year olds and 51% of 35-44 year olds were over-indebted.

  • High income households were also more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low income households (in the bottom 20%).

  • Sydney and Melbourne had the highest number of over-indebted household at 407,000 and 419,600 households, respectively. Over-indebted Sydney households who held property debt owed $269,000 more on average than over-indebted Melbourne households who held property debt.

  • Average home loans for over-indebted households were over four times the size of home loans held by other households carrying debt ($286,400 compared to $59,500), and other property loans were over 11 times the size on average ($219,800 compared to $18,500).

  • Most over-indebted households (77%) lacked sufficient ‘liquid‘ assets to cover a quarter of the value of their debts. Liquid assets are assets which can be easily converted to cash and include bank accounts, shares, own businesses, and superannuation (age permitting). Lack of liquid assets may place over-indebted households at risk of defaulting on their loans if their incomes are not sufficient to meet repayments.

So what is the significance of this?

 

According to the ABS report [2], the increase in household over-indebtedness represents cause for great concern as it represents a strong indicator of vulnerability in the event of economic shock. Examples of such events include: s increases to interest rates, the loss of a job, illness or injury, a change in family circumstances or a decrease in asset prices.

 

Put simply, a sudden change in any of above places households at greater risk of mortgage default.

 

As most debt and over-indebtedness relates to property ownership, we cannot stress the importance of consulting with appropriately qualified professionals such as mortgage brokers and financial planners if you are considering purchasing property.

 

A simple consultation has the potential to drastically reduce risk of default and could potentially save you financial and emotion heartache should circumstances change for the worse.

 

For further information on household indebtedness, the full ABS report can be viewed at:

 

http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0~2015-16~Feature%20Article~Household%20Debt%20and%20Over-indebtedness%20(Feature%20Article)~101

 

 

 

Sources:

[1] http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0~2015-16~Feature%20Article~Household%20Debt%20and%20Over-indebtedness%20(Feature%20Article)~101

 

[2] ABS- Household Income and Wealth, Australia, 2015-16 

 

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