Housing debt and asset values now at its highest level
With interest rates at an all-time low, many Australians are taking advantage of the low mortgage rate environment to purchase property, but by doing so they are accumulating a higher level of housing debt due to property prices ever increasing, especially in Sydney.
Today housing debt is on the up and the ratio of household debt to disposable income is recorded at a record high of 155.9%. Over the past year, this ratio has increased by 2.7%, and this is the greatest annual increase since the 12 months to June 2010.
The level of debt first started climbing again in the June 2012 quarter where it increased from 145.4% to 155.9%. This was the same time that housing values across the capital cities also started to increase in value, as more people were entering the market.
Going back 30 years, housing debt accounted for 65.6% of household debt, whilst in March 2015, housing debt now accounts for a whopping 91.2% of the total household debt which is massive. The idea back then was to buy a property and to live in it for the rest of your life and pay off your mortgage in 30 years. Today, this ideology has changed and more and more people are turning to property as an investment tool and won’t necessarily live in a property all their life as there’s a tendency to move around more.
Interestingly, when you compare investor debt and owner occupier debt, investors have a lower ratio of housing debt of 49.0% compared to owner occupiers who have a debt to income ratio of 93.1%; however investor debt is growing at a much faster pace.
Since June 2012, owner occupier debt has risen from 88.0% to 93.1% in March 2015, whilst investor debt has gone from 42.8% to 49.0%. So, looking at these figures in percentage terms, owner occupier debt has increased by 5.8%, whilst investor debt has increased by 14.5%.
Even though household debt is growing, asset values are also increasing at a much faster pace than the accumulation of debt. In March 2015, the ratio of housing assets to disposable income was 447.4%, the highest it’s been since September 2010, whilst the ratio of financial assets to disposable income was recorded at 356.4%, its highest level on record.
It is important to remember that debt can be good and bad, but purchasing property is considered ‘good debt’. Investors also generally take out interest-only loans so are effectively not paying off their housing debt, so they can concentrate on growing their wealth by using their equity from the rise in property values to buy their next investment property. However, they are more at risk if property values fall as they will have negative equity.
Owner occupiers on the other hand tend to pay down their mortgage every month. With mortgage rates so low at the moment, many owner-occupiers are taking advantage of this low interest rate environment by paying down their mortgage with extra payments as quickly as possible in order to get a step closer to owning their home before interest rates rise. Paying down their mortgage will also effectively increase the amount of assets they own and their debt will reduce.
Even though Sydney is seeing very strong growth in its property values at the moment, in order to enter the Sydney property market, buyers need to take on larger amounts of hosing debt. To counterbalance this, the banks and lenders are putting in constraints to protect themselves and to help ensure investors are in a position to afford this level of debt if interest rates were to rise.
It is important when buying property to try and not be scared of debt as you are using this debt as a tool to help create wealth and own a property. However, with housing debt and property values ever increasing it is becoming more and more important to ensure that you buy sensibly and within your budget to avoid getting into financial difficulty.
Published on 7th of July 2015 by Marty Stanowich