Households continuing to deleverage as house prices fall: RBA

Australian households continue to pay down their debt and increase their savings as house prices fall, the new RBA’s March 2012 Financial Stability Review (FSR) says.

“Real net worth per household is estimated to have fallen by 6.5% over 2011, to be 11.5% below its 2007 peak… This contrasts with the rapid trend expansion in this series over the decade to 2007 when average annual growth was 6.5%,” says the RBA.

According to the RBA, the recent weakness in household wealth has been driven by dwelling prices, “which were down about 4% on an average nationwide basis over the year to December 2011 with prices declined in most cities over the year”.

“Housing market conditions remain soft; preliminary data indicate that dwelling prices have fallen a little in early 2012. At the national level, the ratio of dwelling prices to income has fallen over the past year, and is below the average of the past decade, while rental yields have begun to pick up, assisted by stronger rental growth as well as lower prices.”

As with the previous September 2011 report, the latest report notes that the household saving rate remains well above the levels recorded in the 1990s and early to mid-2000s, with households “actively shifting their portfolios towards more conservative assets such as deposits”

“The aggregate debt-to-income ratio has drifted down over the past year, with demand for new debt remaining low and many households choosing to repay their existing debt more quickly than required.

“Solid income growth is also helping to support households’ debt-servicing capacity. In aggregate, households are managing their debt levels well, though mortgage arrears rates are still a little higher than a few years ago,” says the RBA.

According to the RBA, part of the motivation for this higher rate of saving “may have been a desire to bolster wealth, given the weakness in some asset markets in recent years”.

“Another sign of the more cautious approach of households is that they have been actively shifting the composition of their financial asset portfolio away from riskier assets like equities and towards deposits.

“From the beginning of 2008 to September 2011, there were net outflows from households’  directly held equities of nearly $50  billion, while holdings of deposits increased by around $210 billion ($94 billion more than in the previous corresponding period).

“The net outflows from equities have come on top of – and were probably in reaction to – declines in equity prices over recent years, especially given that the resulting capital losses coincided with more attractive rates of return available on deposits,” says the RBA.

The comments are in line with the previous FSR report issued in September 2011, where the RBA noted that the financial position of the household sector “continues to be shaped by a more cautious attitude to spending and borrowing, as evidenced by the considerable increase in the household saving rate”.

“After trending up since the mid 2000s, the household saving rate rose further over the past year, reaching 10.5% of disposable income in the June quarter. It is now at levels similar to those last seen in the mid-1980s,” the RBA said in the last report. 

The RBA has also released a chart showing the 15 regions with the highest rates of mortgage arrears.