If you thought the global financial crisis had killed off Australians’ penchant for taking out big mortgages, think again
Household indebtedness is back near record highs, after only a brief slowdown between 2008 and 2012.
The ratio of household debt to income is 151 per cent, the highest since March 2008 and just below its all-time peak of 153 per cent, latest figures from the Reserve Bank show.
As the graph shows, this measure has tripled since the early 1990s, despite the short interruption from the global financial crisis.
Our debt levels are also higher than those of most other developed countries, many of which have suffered housing busts.
So it’s hardly surprising that investors overseas often worry about this high debt load, and how borrowers would cope if they were hit by an economic shock or a sharp rise in interest rates.
The Reserve Bank has also been giving borrowers some not-so-subtle hints that it does not want to see borrowers take on too much more debt, most of which is used for buying houses.
It’s their job to worry about these things, but the central bank has a good point.
Despite record low interest rates, the RBA says the likely burden of meeting loan repayments was at about its 10-year average.
In NSW and Victoria, it said the share of household income needed to pay the interest on an average loan over the next 10 years was already near “historical highs”.
In other words, average households in the two biggest states are already directing plenty of their budgets towards paying interest on their loans.
As a result, many economists reckon average household debt compared with income is probably close to its limit – because people would struggle to afford to carry too much more.
All the same, there remains the risk of borrowers overcommitting, especially when interest rates are at their very low current levels and there is hot competition in the property market.
With mortgage rates below five per cent, it’s important to make sure you would not be caught out if interest rates rise, something you can test using the MoneySmart online mortgage repayment calculator.
To save us from ourselves, the financial regulators are also looking to introduce new restrictions on bank lending for property purchases. This is what the clumsily-named “macroprudential policies” are designed to do.
It’s most likely that these new rules will make it more expensive for banks to lend to property investors, rather than first home buyers or other owner-occupiers.
There is also a chance banks will be told to be more rigorous when they are assessing whether borrowers can afford the debt they are taking on.
If you’re someone who’s taking out a loan, it’s all the more reason to make sure you’d be prepared if interest rates were to rise – something that’s bound to happen eventually.