To me next year is all about debt. This of course will influence the housing market.
Weak incomes and already high debt leverage are constraining further borrowing.
This is illustrated by the fact that despite the lowest mortgage rates since the 1950s, the debt-servicing ratio for households is near its 2008 peak, back when the cash rate was 7.25%.
And in case you have somehow forgotten the current cash rate is 0.75%.
Debt is now growing faster than income.
As a result, the average household gearing now stands at an all-time high of 200% of annual income. By way of comparison, the average leverage was 120% in 2000.
Gauging leverage from a different perspective, mortgage debt has risen – on average across the country – to 30% of the value of the housing stock, meaning that housing equity has fallen to 70%.
Now many may think that 70% equity is great news.
But the RBA reports that at least 75% of small business loans are collateralised, with about two-thirds of this lending secured by housing.
This substantially reduces the equity positions of many households.
The table below looks at the estimated average household debt and equity by each Australian state and territory.
Average household debt and equity
| State or territory | Household debt | Household equity |
| New South Wales | 190% | 75% |
| Victoria | 215% | 73% |
| Queensland | 185% | 65% |
| South Australia | 155% | 69% |
| Western Australia | 190% | 59% |
| Tasmania | 130% | 75% |
| Northern Territory | 110% | 55% |
| Australian Capital Territory | 110% | 70% |
| Australia | 200% | 70% |
| Matusik + NAB. Financial 2019. |
High debt levels leave many Australian households susceptible to economic shock. It’s a double edged sword if you run a small business.
And lets hope that 2020 isn’t a shocking year.
I don’t know about you, but Christmas at our joint will be tight this year.