Though relative to nominal GDP, Australia has the second highest level of household debt, HSBC analysts believe the household debt has been rising for fundamental reasons and hence doesn’t pose much worries. Paul Bloxham and Daniel Smith at HSBC in their May 16 research note titled: “Downunder Digest” reckon high household debt concerns should make Reserve Bank of Australia to strike a hawkish tone rather than dovish. So is Australian household debt an issue? And if not, why?

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Bloxham and Smith point out the Australia’s household debt is high by international standards. Tracing recent rise in household debt in Australia, they point out that the country’s household debt-to-income ratio has been steadily rising from 167% in 2011 to 190% in Q4 2016. Highlighting two different perspectives on the increasing household debt, the HSBC analysts point out that while on one hand, high levels of debt make the economy more vulnerable to a negative economic shock, on the other hand, if the debt is appropriately allocated, it would act as an engine of economic growth.

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Australian household debt

The analysts ascribe two reasons for Australia’s high household debt level. First, the bulk of the housing stock, including the rental properties, is owned directly by the household sector through leverage. The HSBC analysts underscore that the owner-occupation rate is high in Australia, at around 68%. The analysts point out that investment properties in Australia, which are subsequently rented, are a tax-favoured investment, and hence the stock of rental properties involves debt on the household balance sheet, rather than the corporate balance sheet. With around one-quarter of Australia’s household debt held by investors, household debt levels are higher in Australia compared to other countries.

Secondly, the HSBC analysts point out that with Australia’s housing-price to income ratio at around 5 times, the country’s household debt remains high.

As highlighted, Australia Prudential Regulation Authority unveiled measures to curb the flow of new interest-only lending to 30% of total new residential mortgage lending.

 Australian household debt distribution was favourable

Complementing Australia’s strong financial regulatory environment, the HSBC analysts point out that all mortgages are full recourse and the country doesn’t have sub-prime borrowers. As the average mortgage holder is around 2 ½ years ahead on their mortgage payments, the analysts argue that the average borrower has a significant buffer on which to draw in the event of job loss or some other negative income shock.

Taking cue from the latest available statistics, Bloxham and Smith note the distribution of debt was favourable in 2014, as most of the debt was held by high income earners and there were few low income households with large debt servicing burdens. The analysts point out that historically investors have been less likely to default on mortgages, as investors tend to have equity in an owner-occupied property.

Striking a cautionary tone, the HSBC analysts point out that in the event of house price growth slowing down, coupled with easing in the pace of household credit growth, Australia’s overall economic growth could weaken.