Household indebtedness is climbing again but is overstated because of the popularity of mortgage offset facilities, investment bank UBS claims.
UBS also finds that housing valuations are “near record highs” and may get more expensive in the year ahead.
In a new economics research report, UBS presents an analysis of Australia’s ratio of household debt to disposable income which conflicts with results published by Barclays’ chief economist, Kieran Davies, last week.
This debate is heating up as property prices soar: on Sunday, RP Data reported that house prices in Sydney had risen 16.3 per cent over the 12 months to April 6, 2014.
Mr Davies claims Australia’s household debt-to-income ratio hit a record of 177 per cent in December 2013. His research was based on the “total household financial liabilities” numbers published by the Australian Bureau of Statistics, which, he said, “is the broadest measure of household debt, covering mortgages, consumer debt, credit cards and small-business debt”.
In contrast, UBS adopted a narrower definition, also used by the Reserve Bank of Australia, which excludes small-business debts secured by residential properties. UBS also adjusted the household debt numbers to account for the recent popularity in “mortgage offset” facilities, “where households deposit cash into an account which offsets their mortgage balance and reduces interest payable”.
Instead of the 149 per cent household debt-to-income ratio published by the RBA (excluding small-business debts), UBS believes the actual ratio was a lower 143 per cent in December 2013 after they netted out mortgage offsets.
Further rises to come
Barclays’ Mr Davies counters that small-business debts secured by residential loans should not be excluded from estimates of household liabilities.
“I prefer to look at the household balance sheet on the whole, otherwise it becomes difficult to know where to stop,” he said. “For example, if you exclude small-business profits from household income, how do you take out small-business tax payments? Similarly, how do you compare household wealth to the household saving rate, when the saving rate still includes small business?”
But UBS’s conclusions on the valuation of Australia’s housing market are broadly similar to Barclays’.
“With house prices re-accelerating to above 10 per cent annual growth in March, the house price-income ratio has rebounded to a near record high,” UBS said. “The RBA’s easing cycle has driven a surge in household loans amid relatively slow household income growth. We expect household leverage to continue to rise further this year.”
UBS said “these trends may make the RBA nervous about how long it can sustain record low rates” and forecast that the central bank will hike rates by 75 basis points next year.
This would lift the current discounted variable mortgage rate from 5.1 per cent to 5.85 per cent.
UBS has a benign view on what these hikes mean for housing conditions, arguing they would only cool capital gains to a 3 per cent annual pace.
UBS’s investment banking arm is one of the advisers on the pending $800 million-plus float of Genworth Australia, which insures banks against losses on home loans.
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