Household debt on the rise
Westpac is forecasting growth in household debt to end as a result of government housing policy.
A combination of low interest rates, tax breaks on property investment and rising house prices have seen household debt spiral to record levels.
Household debt rose by 35 per cent since 2012, Westpac economist Satish Ranchhod said.
‘‘Now, with the housing market cooler than it was in previous years, the creep upwards in household debt has slowed. And over the coming years, policies aimed at dampening housing market pressures will put a brake on further debt accumulation.’’
The rise in household debt since 2012 was roughly double the increase in household income, he said.
‘‘Households are now carrying debt that is equivalent to 168 per cent of their annual disposable income, a level that’s well above the peak of 159 per cent that we saw just prior to the [global] financial crisis.’’
Low interest rates kept borrowing costs down, but it also depressed bankdeposit returns, which encouraged people to take risks on property. Ranchhod said: ‘‘With low interest rates generating low nominal returns on savings, investors have sought to diversify into housing and other assets.’’
That’s been tough on aspiring home buyers. But high house price rises had encouraged spending and further borrowing, he said.
‘‘Strength in the housing market also saw homeowners spending some of the windfall they perceive when the value of their house rises. The net effect has been more borrowing and more spending, with the low cost of borrowing reinforcing both of these trends.’’
High household debt had raised questions about the long-term impact on the economy. That included concerns about the eventual drag on economic activity from increased debt servicing obligations, he said.
‘‘In addition, higher debt levels mean that the economy is more vulnerable to unfavourable changes in economic or financial conditions, especially as such disruptions could be amplified through changes in the housing market.’’
Despite that, he did not expect the increase in debt levels to ‘‘topple the economy’’.
Recently eased loan-to-value ratio (LVR) restrictions from the Reserve Bank had seen borrowing begin to increase again. But Ranchhod expected this resurgence to be ‘‘short lived’’.
‘‘The Government has already extended the holding period for taxing capital gains on investment properties from two to five years [the so-called ‘bright line’ test]. Over the coming years we also expect the ability to use losses on rental properties to offset other tax obligations [i.e. negative gearing] will be significantly curtailed.’’
Even if the Reserve Bank eased the LVR restrictions further, Westpac still expected those policies to slow household borrowing increases.
‘‘We expect that the coming slowdown in the housing market will also see softness in household spending growth.’’