House prices ‘flash red’ as debt to income ratio hits record high
PUBLISHED: 2 HOURS 44 MINUTES AGO | UPDATE: 0 HOUR 50 MINUTES AGO
House prices ‘flash red’ as debt to income ratio hits record high
Photo: Louise Kennerley
CHRISTOPHER JOYE
Australian household debt has hit a record 177 per cent of annual disposable income while housing valuations are “flashing red”, according to Barclays’ chief economist, Kieran Davies.
“House prices now equate to 4.3 times annual income and 28 times annual rent, both within a fraction of their historic highs,” Mr Davies said.
The respected former treasury economist believes the RBA is “worried about the strength of the housing market, where the evolution from recovery to boom has brought jawboning by the governor into play.”
“We’re paying more attention to house prices and credit than the currency to see if the RBA changes its mind on macro-prudential tools [which limit lending growth] to gauge if housing strength could trigger a rate rise this year.”
In March RBA governor Glenn Stevens warned “we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm”.
“Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market … that would be unwelcome,” Mr Stevens said.
Australian house prices leapt almost 11 per cent over the 12 months to 31 March to record levels in absolute terms, with capital gains of 15 per cent experienced in the nation’s largest city, Sydney.
Using ABS data on total Australian household liabilities and incomes, including small business debts that are excluded from similar RBA metrics, Barclays found that the ratio of household debt to disposable incomes has hit a record of 177 per cent.
“This is up from a recent low of 173 per cent and exceeds the previous high of 175 per cent reached in 2010,” Mr Davies noted.
In striking contrast to consumers in the US and UK, Australian families have boosted debt relative to incomes since the 2008 crisis. The RBA put the household debt to income ratio at 149 per cent in December, just a touch off its 153 per cent peak in 2006.
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Source: Australian Bureau of Statistics, Bloomberg, Reserve Bank of Australia, Barclays Research
Mr Davies says the large increase in Australian household debt over the 1990s and 2000s has heightened consumer sensitivity to changes in interest rates.
“Increased leverage and more investor activity increases the scope for more volatility in house prices, which could spill over into the broader economy given most people have the bulk of their wealth tied up in housing,” he said.
Barclays’ analysis of the Australian housing market’s valuation puts average house prices at 4.3 times annual incomes, which is “a fraction under the all-time high of 4.4 times income reached in 2003 and 2010”.
“The ratio of prices to incomes has been extremely high compared with history for about a decade now with the average over the last century only 2.3 times” Mr Davies observed.
Barclays also found that average Australian home prices were 28 times annual rents in the first quarter of 2014, which is just below the 29 times record touched in 2007 and 2010 and double the 14 times average over the second half of the 20th century.
HSBC’s chief economist, Paul Bloxham, is more sanguine about housing market conditions, arguing that “the recent increase in prices is roughly in line with what should be expected, given that mortgage rates are at 50-year lows”.
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Source: Australian Bureau of Statistics, Real Estate Institute of Australia, RP Data-Rismark, Stapledon, Barclays Research