Sometimes just one figure is enough to explain what seems to be inexplicable – the continuing rise of Australian property prices despite a recession, a pandemic and worsening unemployment.
That figure – which was produced by AMP Capital – is that the share of household income being used to pay interest on debt has fallen to the lowest level in 35 years.
That is a very big deal because it effectively drops tens of billions of extra dollars straight on to the household bottom line, despite the economic difficulties posed by the pandemic.
Loans have never been this cheap to service
According to the figures, interest by Australian households dropped to about 5.5% of disposable income at the end of December.
Despite the rout in the bond market which is forcing up long term bond yields, the level of disposable income used to service household interest payments might continue to fall as the spate of refinancing out of higher rate loans and into low fixed loans continues to gather pace.
To give that 5.5% of disposable income used for debt servicing some context, the number stood at almost 9% in the middle of 2019 and was above 13% back in 2008.
Plunging official interest rates slashed loan repayments
There is no tremendous secret to the decline in the amount of cash needed to service loans with plunging official interest rates falling all of the way to just 0.1% last November – leading to a rush of lower rate loans on offer, particularly fixed loans.
Helping the falling rates, the Reserve Bank of Australia was also instrumental in ensuring that low fixed rates reached customers, offering around $200 billion to banks to lend over a three-year term for rates of just 0.25% and later just 0.1%.
Banks have been falling over themselves to get these fixed loans out the door and why not, when even at current tiny interest rates – some just under 2% – they are still earning a worthwhile margin and getting market share.
Households have extra $9b to spend every quarter
AMP Capital chief economist Shane Oliver has estimated that the fall in interest payments as a share of disposable income is injecting about $9 billion more into the household sector each quarter compared with two years ago.
That has not only supported consumer confidence and spending but also helps to explain how households have been able to simultaneously increase their savings rate to around 20% and also make inroads into paying down debt – either directly or by putting funds into offset accounts.
Money flying into offset accounts
The RBA said around $40 billion, or 4% of all disposable income, was made into mortgage offset and redraw accounts between March and December last year.
In its February statement on monetary policy, the RBA said: “The increase in payments is likely to reflect a combination of reduced opportunities for spending, mortgage holders saving for precautionary reasons, and some borrowers depositing cash received from early release superannuation and fiscal payments into these accounts.”
Home loan serviceability can always get worse
The figures might also give some pause to the more exuberant borrowers who are gorging on debt at the moment – and help to explain why so many people are saving and paying down debt.
There have been some very tough times to be paying off debt in Australia’s history such as the late 1980s when household interest payments climbed to about 10% of disposable income when official interest rates surged to 18%.
There was another peak of 13.3% in 2008 when the mining boom pushed interest rates higher.
However, the seemingly endless rise of Australian property prices is much more logical when you imagine that an extra $9 billion is available to households every quarter, with at least some of this improved loan serviceability being swallowed up by higher prices when houses are bought.
With longer term bond prices spiking though and a complete history of loan serviceability showing a range of peaks and troughs, the one thing that is certain is that the good times never last too long and the current ease of paying loans will one day be replaced by a much tougher time.