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The household is Australia's biggest challenge--income, debt and balance sheet

Peter Warnes  |  20 Jul 2018Text size  Decrease  Increase  |  
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The level of concern about the household sector is clear-cut in the minutes of the Reserve Bank’s 3 July Monetary Policy meeting. So much so, a special paper on the level of household debt was prepared for the meeting.

Committee members observed that “compared with the average of the preceding 20 years, growth in household income had remained subdued over the most recent couple of years, with growth in all components of income remaining below average.”

While growth in labour income had increased to its highest level since 2012 and growth in average hourly wages also increased, wages growth remained low. This reflects a larger workforce, driven by immigration and while average hourly wages have increased, the growth of part-time employment, at a faster rate than full time, is keeping overall wages growth in check. Consequently, individual household income from the main source, labour, remains below trend consistent with spare capacity in the labour market.

“Household debt increased by more than household income over the preceding three decades in many countries, but particularly so in Australia.” What distinguishes the Australian housing market from other countries is the high percentage of private ownership. Obviously, the debt is therefore higher in the household sector, with corporate ownership of rental properties proportionately lower. The larger percentage of the population living in detached housing also results in higher borrowing per household.

While data indicates most “Australian household debt is owed by higher-income and middle-aged people who tend to have more stable employment and often larger savings buffers”, a “material share of household debt is held by lower-income households, which generally have higher debt relative to their income.” In addition, most household assets comprise housing and superannuation, and both are illiquid.

High levels of debt expose households to economic shocks, which when they occur impact consumption and can affect economic outcomes. Therefore, household balance sheets continue to warrant close and careful monitoring. I have been singing off this music sheet for over a year now.

Even without an economic shock, the decline in house prices is dampening the positive wealth effect of previous years. This “feel good” mind set underpinned consumption and justified raiding the piggy bank to an extent the national savings ratio slumped to 2.1% in the March quarter, a level not seen since pre-GFC days of 2006. Household balance sheets are one concern, so also is household consumption given its influence on GDP growth.

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Out-of-cycle rate increases will begin to infiltrate the banking sector and the four majors will be the last to move. Net interest margins are under pressure as the cost of funds increases driven by upward moves in international wholesale interest rates. It is unlikely deposit rates will be increased, so the S&P/ASX 200 dividend yield of 4.1% is supportive of the market, at least in the near term.

Belatedly, APRA has come out in support of the banks reeling from the Hayne Royal Commission fire storm. Banks are in the business of taking risks and customers must realise their decisions are not risk-free. The principle of caveat emptor, or let the buyer beware, applies. There is little doubt the culture and behaviour of banks has not been exemplary, but it is also important to recognise the role banks play in the financial system and the economy. It seems to me the slide in bank share prices has run its course, which is also supportive of the market.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


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© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is Morningstar's head of equities research.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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