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Can households afford large home loans?

By Michael Walkden


It seems that the price of houses for sale keeps going up and up, but it’s important to remember that property – like most things – works in cycles. It’s always prudent to keep an eye on property values to ensure that housing affordability does not outstrip the means of the general population, but it’s equally important to keep things in context.

An economic report released in March by the Australian Bankers’ Association (ABA), entitled Key truths on housing Australia, notes that while we are currently experiencing rapid price growth (especially for real estate in Sydney and Melbourne), there have been two declines and rebounds since the GFC.

What’s more, while we have had distinct cycles since 2009, prior to the GFC there were several up periods without the down time that lets off steam in the market. Figures from CoreLogic RP Data seem to support this assertion, showing that the 2001-2004 property boom far exceeded the current levels of growth. While real estate in Sydney has appreciated by 38.8 per cent in the current spate of capital increases, in the same period post-2000, a 60.2 per cent rise was shown.

Similarly homes for sale in Brisbane might be 10.9 per cent more expensive thanks to recent growth, but this far below the 91.5 per cent rise seen in the same period after 2000. That’s right – Brisbane houses almost doubled in value over that time. And since then? It’s considered one of Australia’s more affordable capital cities. It’s the perspective that makes the difference.


The ‘Key truths’ report highlights that household debt is accelerating faster than income growth, but there is a degree of parity with other benchmark economies, such as New Zealand and Canada. However, another report by the ABA released in June shows there is much more to the story.

The report is focused on household borrowing and reveals some interesting tidbits of information regarding the ability of families and individuals to repay their debts. While the debt to income ratio has some economic commentators worried, the debt to asset ratio of households is exceeding this. What does this mean? It indicates that Australians are good at saving and building their wealth. So much so, that their assets are appreciating in value faster than they are getting raises at work.

To put this in perspective, the report reveals that for every $1 in debt owed by households, $6 of assets is held. In fact, when only mortgage debt is considered, the figure is still an impressive ratio of $3 of house value for every $1 of housing debt.

Other key findings from the report include the fact that interest payments when compared to income are at a generational low, as dropping interest rates make borrowing more affordable, and that households are paying off debt very quickly. Interestingly, according to the study, the average Australian family is two years ahead on their mortgage.

The good news is that not all of this wealth is locked into bricks and mortar. There is a considerable amount of savings held in superannuation and traditional bank accounts or term deposits. Just how much are Aussies putting away? The Reserve Bank of Australia reveals in its June snapshot of the economy that average weekly earnings are $1,129 and that the household saving ratio is 8.3 per cent.

While the June ABA report reveals that Australia’s household wealth is concentrated in real estate – $5.1 trillion worth of dwellings – the Australian Taxation Office shows that there is some balance too. As at June 2014, $1.9trillion of superannuation had been accumulated by Australians showing that, once again, there is more to us than meets the eye.

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