Aus household debt continues to outrun income

Household debt in Australia is still growing faster than household income, putting upward pressure on the already high household debt-to-income ratio. The gap between debt and income growth has widened this year despite policy moves.

ANZ Research believes the Reserve Bank of Australia will opt to raise rates around the middle of 2018, as long as the central bank is confident inflation is not moving lower and the economy is on track to deliver a falling unemployment rate. 

" Households are likely to feel the pain of quite modest increases in interest rates and adjust their spending and borrowing relatively quickly."

The forecasts in the RBA’s November statement should reveal whether it thinks the economy is still on track to deliver such a set of outcomes.

The gap

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Historically the gap between debt and income in Australia growth correlated highly with interest rates.

While there is some support for thinking acceleration in income growth may narrow the gap, ANZ Research thinks it unlikely it can be closed without additional policy action.

Having said this, the slight slowing of growth in household debt in recent months suggests policymakers will not rush into concluding that further measures will be required. When they do act, we think macro-prudential policy will be the first port of call.

Ultimately, we think it will take at least somewhat higher interest rates to bring household debt growth in line with income growth.

Indeed, with debt now much higher than income we actually need to see debt growth slowing below income in order to stabilise the household debt-to-income ratio.


News house prices in Sydney fell for a third month in a row in September (in seasonally adjusted terms) triggered commentaries about the end of a 55-year boom in house prices and, from at least one bank, the possible need for interest rate cuts to arrest the slide.

Continued weakness in retail sales is also troubling many economic commentators. Yet the most recent RBA data on private sector credit showed that in the year to September housing credit was up 6.6 per cent.

From a policy perspective, a key question is whether the RBA and the Australia Prudential Regulation Authority has confidence macro-prudential policy will slow debt growth sufficiently against the backdrop of continued low rates. This might be a significant challenge.

To get a better feel for the importance of interest rates, we need to take into account what appears to be a structural break in the relationship between the debt/income gap and mortgage rates around the time of the GFC. The two charts below split the data into the periods up to the end of 2008 and then from 2009.

Given the increase in debt over the past few years, we expect mortgage rates would not need to increase to that level to bring debt growth into line with income growth.  

Indeed, our view is households are likely to feel the pain of quite modest increases in interest rates and adjust their spending and borrowing relatively quickly.

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There are two sides to the debt/income growth gap, of course. A marked acceleration of income growth might narrow the gap materially without necessitating higher interest rates.

Keep in mind, though, the developments likely to trigger higher income growth may very well trigger a willingness to take on more debt.

Hence a pick-up of income growth on its own may do little to narrow the gap with debt accumulation. Similarly, the factors that might slow debt growth could trigger a slowing of income growth.

David Plank is head of Australian economics at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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