Even though international investors often whinge and moan about Australia’s relatively high household debt levels, the fact is that a large chunk of it is held by wealthy people who have built colossal savings’ buffers to withstand tough economic times.
A new HSBC Bank Australia report, Australia’s household debt: why we are not worried, said that around “three-quarters of all household debt is being serviced by the top two fights of income owners” and that the average mortgage is pre-paid by a staggering 21 months.
Report author Paul Bloxham, chief economist for Australia and New Zealand at the bank, said many borrowers are protecting their Australian Dream by plonking large wads of cash in an offset account or surging ahead of repayment schedules.
“Most international observers find that fact surprising,” he said in an interview.
“That tells you that while household debt is seemingly high in Australia, those mortgages are fairly secure because the average borrower is well ahead on their repayments.”
While it’s not surprising that households have become thriftier after hearing about massive homeowner defaults in nations such as the US, Greece and Spain since the global and European financial crisis, the extent of the conservatism is.
In the Reserve Bank of Australia’s Financial Stability Review published in September 2012, prepayment buffers stood at about the 18-month mark, from 15 months in 2008.
Not the only reason to not worry
Bloxham used the fact of large buffers in conjunction with two other arguments to defy the sceptics panicking over a housing bubble and over-leveraged borrowers.
He said that house prices for the past decade have grown in line with incomes and debt has done the same for the past seven years. “Australian household debt is around 150 per cent of disposable income and has been broadly steady since around 2006,” he said.
Also, Australia has had an undersupply of housing in recent years – not an oversupply as was the case in the US, Spain and Ireland.
“Australia has too few houses to meet new demand and recent data show that population growth is once again outpacing growth in new housing construction in Australia,” said Bloxham.
Written by Vish Teckchandani for the Australian Banking and Finance Journal.