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Household wealth rising, but so is mortgage debt and stress

Nicki Bourlioufas  |  18 Sep 2017Text size  Decrease  Increase  |  
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A new report reveals Australians' income has barely grown in recent years, though household wealth has risen, spurred on by higher property prices.


Debt too has jumped, increasing mortgage stress in households and Australians' vulnerability to higher interest rates.

According to the Australian Bureau of Statistics' (ABS) Survey of Income and Housing, in the eight years to 2015-16, average weekly household income grew by just $27 to $1,009.

In the four years between 2003-04 and 2007-08, average weekly household income grew by $213 in real terms to $982, highlighting slowing income growth, according to the ABS.

The report found that average household wealth increased 11 per cent between 2013-14 and 2015-16, from $835,300 to $929,400, in real terms. Rising property values were the main reason for this increase. The average total value of household property assets increased to $626,700 in 2015-16 from $548,500 in 2013-14.

However, wealth remains very unevenly divided, with the wealthiest 20 per cent of households in 2015-16 holding more than 60 per cent of all household wealth, averaging $2.9 million per household, the ABS report found.

In contrast, those in the middle 20 per cent held 11 per cent of all household wealth, averaging $528,400 per household in 2015-16. The lowest 20 per cent controlled less than 1 per cent of all household wealth, with average wealth sitting at just $36,500.

Debt too is marring the picture of happy households. In 2015-16, based on the ratio of debt to either income or assets, around three in 10 households (29 per cent) were classified as "over-indebted," up from 21 per cent in 2003-04, the ABS said.

During the same period, the mean household debt has increased by 83 per cent in real terms to 2015-16, driven by property debt, while mean asset value rose 49 per cent and gross income 38 per cent.

The ABS report reveals Sydney and Melbourne made up 43 per cent of over-indebted households, while only accounting for 38 per cent of total households. Over-indebted Sydney households who held property debt owed $269,000 more on average than over-indebted Melbourne households who held property debt.

Breaking that down, half of Sydney households with property debt were over-indebted (51 per cent), with these households owing $765,400 in total property debt.

Around half of Melbourne households with property debt were also over-indebted (51 per cent); however their average property debt was considerably less, at $496,400. An additional one percentage point interest rate rise might therefore cost over-indebted Sydney households around $43 more per week than Melbourne households, the ABS said.

The high level of household debt makes Australians much more vulnerable to rises in interest rates.

According to new data from research firm Digital Finance Analytics, more than 860,000 households Australia-wide were estimated to be in "mortgage stress" in August 2017, with more than 20,000 of these in severe stress. This equates to 26.4 per cent of households, up from 25.8 per cent in July.

Households are "stressed" when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30 per cent) going on the mortgage.

Martin North, principal of Digital Finance Analytics, said flat incomes meant rising costs were not being managed by many households.

"Household budgets are really under pressure. Those with larger mortgages are more impacted by rate rises if and when they occur," he said. "We also estimate that nearly 46,000 households risk default in the next 12 months."

"Those households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure, or sell their home.

"Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell."

The ABS report also found that most over-indebted households (77 per cent) lacked sufficient "liquid" assets to cover a quarter of the value of their debts. The 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.

According to the Commonwealth Bank, interest rates will rise in 2018 at least once. Gareth Aird, senior economist with the Commonwealth Bank, said lacklustre income growth is taking pressure off interest rates this year.

"As such, we have the RBA on hold until late 2018. However, with each robust monthly employment report the risk of a rate hike before late 2018 inches higher," he said after the release of robust August jobs numbers.

Monthly trend full-time employment increased for the eleventh straight month in August. Full-time employment grew by a further 22,000 persons in August, while part-time employment increased by 6,000 persons, underpinning a total increase in employment of 27,000 persons that month.

The unemployment rate remained at 5.6 per cent.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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