So how much debt are Australians in these days? The Australian Bureau of Statistics (ABS) has just released their Personal Wealth and Wealth Distribution, Australia report. This report analyses data from the ABS Households, Income and Labour Dynamics in Australia (HILDA) survey to detail what the average Australian’s personal wealth looks like. And it’s a pretty mixed bag!
It seems Australians have a lot of debt but also very healthy savings balances compared to other countries. However, the average Australian’s savings is low relatively and people are in hock to the tune of a massive $20,600!
Hmmm… What’s going on there? Let’s take a closer look.
Debt levels are high but not as bad as we thought!
The report states that the 2016 median household debt was $24,700 and it’s a 2% rise from 2015. That’s not too bad considering that just five years ago, the average household debt was $26,100. So it’s gone up by only one third – not bad.
However, looking at debt to disposable income ratio shows a different picture!
Australians have a staggering amount of debt when compared to other countries. The global average is around 170%, but in Australia it’s over 300%. So yeah, Australians are in a heap of debt!
What kind of debt do Australians have?
The good news is that most of the debt is actually secured debt, i.e. mortgages, business loans etc (as opposed to unsecured debt which is personal lending: credit cards, personal loans and so on). That means that when your house price falls you lose your home and when you default on an unsecured loan you face a major financial blow. So if you think your debt is bad, you should consider yourself lucky!
On the other hand, this also means that Australians don’t have to worry very much about their debts. For example, Australian’s are unlikely to lose their home to repossession as the percentage of people that owe more than 50% of the value of their house is low. And when people do default on personal loans (they miss a few payments) they can still manage to get their loan restructured with lower interest rates and so on.
House prices are high but not as high as we thought!
Firstly, the report states that “household wealth in Australia is higher than previously estimated. The median value of all household assets (excluding superannuation) increased from $1,085,402 in 2011 to $1,178,557 in 2016”
However, this is compared to 2011 data and not 2010 since the ABS have changed their methodology in 2016. So the real increase in wealth would be even higher.
The report also states that house price growth has been much more moderate than we thought. From the report: “House prices increased by 31% between 2011 and 2016. However, since 2006 there has been a 59% increase in Australia’s median house prices (to $622,000)”.
So yeah, house prices are still increasing – but at a much slower pace than we thought! To put it in perspective, the past 5 years have seen Sydney prices increase at about 10%, while the past 10 years have seen Sydney house prices increase by over 220%.
What does this mean? Firstly, it means that wealth overall has increased (but just not as much as we thought). And for property investors it means that that house price growth may be a lot slower than people assume.
What does this debt level mean for property investors?
I think the most important thing to take away from this is that property investors should be very careful about using these numbers to make assumptions about the future. The report points out that: “house prices and rent have again exhibited a high level of volatility, primarily driven by developments in the established housing market” (p. 11).
Property investors should recognise this as a major risk and not rely on past trends holding true in the future. Even minor changes in circumstances (eg. a new train line opening up suburbs) can have a major effect on property prices.
Some property investors are also referring to the commentary as if it is another sign of how bad the situation is. They are comparing current house price growth to Sydney’s history and assuming that this means that prices will continue to fall forever.
But I do not believe this is the case. The reason is because the conditions for negative growth are not in place.
In order for negative growth to happen, we need two things: property prices falling and interest rates rising. Currently, both of these are not happening. Although house price growth is slowing in some areas (eg. Melbourne’s fringe), the overall rate of price increase is still higher than mortgage interest rates.
Property investors must realise that their strategy now relies on this continuing to happen for several years before they can achieve a positive cash flow.
Conclusion – what does this debt level mean?
These debt levels in Australia are higher than other countries – but not as high as we might expect. Australians are very much in debt – but the majority of that debt is secured. And the data used in this report is already a few years old so it’s possible that house price growth will be even slower than what’s shown here.
However, property investors still have to keep this all in perspective and remember that the market is currently only suited to long-term positive cash flow investors looking for very large returns. If you’re looking to buy property for capital growth over the next 10 years you can find some good bargains in Sydney and Melbourne. But don’t expect this to continue forever!