The Reserve Bank of Australia's recent decision to increase the cash rate to 6.5% has sparked renewed discussion regarding the vulnerability of Australian households to higher debt repayments. This is clearly a big issue for home owners especially considering that this marks the fifth increase in the cash rate since 2004.
Interestingly, data released from the Australian Bureau of Statistics (ABS) highlights that much of this 'panic' is unfounded. Specifically, the ABS results show that the median household monthly mortgage repayment has increased by 66.7% from 1996 to 2006. This may seem like a pretty big increase and there is no doubt that it is however, the results also show a corresponding increase in median household weekly income of 65.6% over the same period! Therefore, on average, mortgage repayments as a percentage of household income have stayed fairly constant.
Additionally, analysis of the data shows that much of the increase in mortgage repayments is actually accounted for by a narrow band of home owners who have a much higher degree of mortgage debt than the average. In itself, this trend of increasing debt levels over the past ten years is not entirely surprising considering the deregulation of the financial markets, the halving of inflation and interest rates.
Further good news stemming from the ABS statistics is that in the 16 years to 2006, household assets have grown by $3 trillion compared to household debt which has grown by $900 million over the same period. Statistics like these place more upward pressure on debt levels as households feel more comfortable with increased levels of debt and their ability to service the repayments. The recent housing bubble has been a large factor in these increased household asset levels and justifiable concern was being felt by the RBA who could see a recession around the corner if the bubble burst. Fortunately, housing prices have flattened rather than burst taking pressure off the RBA.
This issue has been a political hot potato in recent times and John Howard commented in Parliament that Australian working families have never had it so good. This ignited healthy debate in question time. Wayne Swan, Shadow Treasurer, questioned the Prime Minister as to how he can say this when household income consumed by mortgage had reached a record 9.5%. The Prime minister retorted by quoting the RBA's March financial stability review.
"The average mortgage repayment on a new owner-occupied loan as a share of average disposable income is below its peak in 1989."
The PM is correct however, there is no doubt that Australian's are sensitive to increased housing repayments and in light of the upcoming federal election, this debate is bound to generate more heated discussion.