In brief, here are 3 key areas handed down by Scott Morrison in the Federal Budget;
Health, welfare and aged care
Renting family home – when a person enters residential aged care and rents their former home, the house and rent will be included for assets and income testing when determining entitlement for an age and service pension. This will only apply to new residents entering residential aged care from 1 January 2017.
Disability Support Pension (DSP) – recipients will have their eligibility reassessed over the next three year to determine their continued eligibility.
Child and Adult Public Dental Scheme – will be available to children and adults covered by a concession card.
Medical Benefits Schedule – fees frozen under the previous budget are to be extended for a further two years.
My Aged Care contact centre – additional funding has been provided to support services provided by the My Aged Care contact centre.
Taxation
Personal tax rate – the income threshold at which the 37 per cent tax rate cuts in will increase from $80,000 to $87,000. This is due to apply from 1 July 2016.
Company tax rate – the company tax rate is currently 28.5 per cent for companies with turnover of less than $2,000,000, and 30 per cent for larger companies.
The budget proposes to progressively reduce the company tax rate to 25 per cent by 2026-27, and commencing from 1 July 2016 for companies with turnover of less than $2,000,000, their tax rate will reduce by 1 per cent to 27.5 per cent.
Small business – a small business is defined as one with annual turnover of less than $2,000,000. A number of concessions are available to businesses that fall within this definition, including a lower rate of company tax rate and simplified depreciation rules.
From 1 July 2016, the definition of a small business will be extended to businesses with a turnover of less than $10,000,000. However, for purposes of accessing the small business capital gains tax concessions, the current turnover threshold of $2,000,000 will be retained.
Unincorporated small business tax discount – currently receive a 5 per cent discount on the tax they pay. The budget included a proposal that will see this discount progressively increase to 16 per cent over the coming years. The discount will increase to 8 per cent from 1 July 2016.
| Financial year |
Discount |
| 2016-17 |
8 % |
| 2017-18 to 2024-25 |
10 % |
| 2025-26 |
13 % |
| 2026-27 and future years |
16 % |
The maximum discount remains capped at $1,000.
Medicare levy surcharge and private health insurance rebate thresholds – effective from 1 July 2018, the indexation of the income threshold will be frozen for a period of three years.
Superannuation
This year’s announcements are probably the most significant since the superannuation reforms that took effect from 1 July 2007. Except for a couple of notable exceptions, the proposed budget changes will take effect from 1 July 2017, subject to being legislated.
Concessional superannuation contributions – Concessional contributions caps of $30,000, and $35,000 for people aged over 49 will continue for the 2015-16 and 2016-17 financial years. From 1 July 2017 the concessional contribution cap will reduce to $25,000 for all.
People with less than $500,000 in super who have not utilised all their full concessional contribution cap ($25,000) in a financial year will be able to carry forward any unused cap and make additional contributions in following years.
Unused concessional contribution amounts can be carried forward for up to five years.
Low income superannuation tax offset – Low income earners (people earning less than $37,000) currently receive a Low Income Superannuation Contribution (LISC) from the government of up to $500 to compensate for the 15 per cent tax paid on their superannuation guarantee contributions.
The current LISC is due to cease from 1 July 2017, but will be replaced with a new non-refundable tax offset of up to $500.
Low income spouses – from 1 July 2017, the current low income spouse superannuation tax offset of up to $540 will be enhanced with the income threshold for the spouse for whom a contribution is made, being increased from $10,800 to $37,000.
Contributions for older Australians – Superannuation contributions can only be made by people aged between 65 and 74 if they meet a ‘work test’ in the financial year in which contributions are made. The work test requires they be gainfully employed, or self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days.
The intention is to remove the work test requirement thereby enabling older Australians to contribute to superannuation without having to meet the work test. This is due to apply from 1 July 2017. However, there is no change to allow people over the age of 74 to make or receive contributions to super, other than mandated employer contributions.
Tax deductibility of super contributions – currently a person may only claim a tax deduction for personal super contributions if they derive less than 10 per cent of their assessable income (+ reportable fringe benefits and reportable superannuation contributions) from employment.
The budget proposes that anyone under the age of 75 will be able to make tax deductible personal contributions, irrespective of their age or work status. This change is proposed to take effect from 1 July 2017.
However, consideration needs to be given to the concessional contribution cap, and any employer contributions that may also be made. Furthermore, a tax deduction for personal contributions cannot create a carried forward tax loss.
Non-concessional contribution lifetime limit – current limit is $180,000 per annum. The budget has proposed replacing the current non-concessional cap with a lifetime limit of $500,000.
Even though legislation has not been introduced, it is proposed this change will take effect from 3 May 2016. And, to complicate matters even further, any non-concessional contributions made since 1 July 2007 will be assessed against the lifetime cap.
Extension of tax on super contributions for high income earners – Australians earning more than $300,000 currently pay an additional 15 per cent tax on their concessional superannuation contributions, bringing the total tax rate to 30 per cent. This is referred to as ‘Division 293 tax’.
Effective from 1 July 2017, the threshold will be reduced from $300,000 to $250,000.
Super pension limitations – Money transferred to the pension phase of superannuation is concessionally taxed. That is, a superannuation fund pays no tax on the income it earns on investments that are supporting pension payments.
In the budget, the government announced restrictions will be placed on the amount that can be held in the pension phase of superannuation. The proposed limit is $1,600,000. Amounts in excess of this will need to either be withdrawn from super, or may be retained in an accumulation account with investment earnings being taxed at 15 per cent.
This proposal is retrospective in that people already drawing income from a pension that has a value of more than $1,600,000 as at 1 July 2017, will need to transfer the excess over $1,600,000 back to an accumulation account.
Anti-detriment payments – An anti-detriment payment is an additional benefit that may be paid from a superannuation fund on the death of a member, where the benefit is paid as a lump sum to an eligible dependent beneficiary. It is proposed that anti-detriment payments be abolished from 1 July 2017.
Transition to retirement pensions – It was expected that the budget would introduce restrictions on the use of pre-retirement, or transition to retirement (TTR) pensions. The approach the government has taken on TTR pensions was not as expected.
From 1 July 2017, the investment earnings derived by a super fund that is paying a TTR pension will not be tax exempt to the super fund. Investment earnings of the super fund will be taxed in the super fund at a rate of 15 per cent, instead of the current 0 per cent.
Conclusion
The initiatives announced in the budget are subject to successfully passing through parliament and with an election looming, the success of any of these making it through the legislative process is uncertain at this stage.
However, most of the initiatives announced do make sense despite what some commentators might have said. Certainly, a number of measures are on the harsh side, but we will have to live with those.
The key message at this point is to keep calm. With most of the announcements, we have over a year to digest the implications and develop alternative strategies, where appropriate.
Source: Treasurer Scott Morrison budget speech
2016 Federal Budget breakdown
/in Financial Advice General Info /by Shellie FisherIn brief, here are 3 key areas handed down by Scott Morrison in the Federal Budget;
Health, welfare and aged care
Renting family home – when a person enters residential aged care and rents their former home, the house and rent will be included for assets and income testing when determining entitlement for an age and service pension. This will only apply to new residents entering residential aged care from 1 January 2017.
Disability Support Pension (DSP) – recipients will have their eligibility reassessed over the next three year to determine their continued eligibility.
Child and Adult Public Dental Scheme – will be available to children and adults covered by a concession card.
Medical Benefits Schedule – fees frozen under the previous budget are to be extended for a further two years.
My Aged Care contact centre – additional funding has been provided to support services provided by the My Aged Care contact centre.
Taxation
Personal tax rate – the income threshold at which the 37 per cent tax rate cuts in will increase from $80,000 to $87,000. This is due to apply from 1 July 2016.
Company tax rate – the company tax rate is currently 28.5 per cent for companies with turnover of less than $2,000,000, and 30 per cent for larger companies.
The budget proposes to progressively reduce the company tax rate to 25 per cent by 2026-27, and commencing from 1 July 2016 for companies with turnover of less than $2,000,000, their tax rate will reduce by 1 per cent to 27.5 per cent.
Small business – a small business is defined as one with annual turnover of less than $2,000,000. A number of concessions are available to businesses that fall within this definition, including a lower rate of company tax rate and simplified depreciation rules.
From 1 July 2016, the definition of a small business will be extended to businesses with a turnover of less than $10,000,000. However, for purposes of accessing the small business capital gains tax concessions, the current turnover threshold of $2,000,000 will be retained.
Unincorporated small business tax discount – currently receive a 5 per cent discount on the tax they pay. The budget included a proposal that will see this discount progressively increase to 16 per cent over the coming years. The discount will increase to 8 per cent from 1 July 2016.
The maximum discount remains capped at $1,000.
Medicare levy surcharge and private health insurance rebate thresholds – effective from 1 July 2018, the indexation of the income threshold will be frozen for a period of three years.
Superannuation
This year’s announcements are probably the most significant since the superannuation reforms that took effect from 1 July 2007. Except for a couple of notable exceptions, the proposed budget changes will take effect from 1 July 2017, subject to being legislated.
Concessional superannuation contributions – Concessional contributions caps of $30,000, and $35,000 for people aged over 49 will continue for the 2015-16 and 2016-17 financial years. From 1 July 2017 the concessional contribution cap will reduce to $25,000 for all.
People with less than $500,000 in super who have not utilised all their full concessional contribution cap ($25,000) in a financial year will be able to carry forward any unused cap and make additional contributions in following years.
Unused concessional contribution amounts can be carried forward for up to five years.
Low income superannuation tax offset – Low income earners (people earning less than $37,000) currently receive a Low Income Superannuation Contribution (LISC) from the government of up to $500 to compensate for the 15 per cent tax paid on their superannuation guarantee contributions.
The current LISC is due to cease from 1 July 2017, but will be replaced with a new non-refundable tax offset of up to $500.
Low income spouses – from 1 July 2017, the current low income spouse superannuation tax offset of up to $540 will be enhanced with the income threshold for the spouse for whom a contribution is made, being increased from $10,800 to $37,000.
Contributions for older Australians – Superannuation contributions can only be made by people aged between 65 and 74 if they meet a ‘work test’ in the financial year in which contributions are made. The work test requires they be gainfully employed, or self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days.
The intention is to remove the work test requirement thereby enabling older Australians to contribute to superannuation without having to meet the work test. This is due to apply from 1 July 2017. However, there is no change to allow people over the age of 74 to make or receive contributions to super, other than mandated employer contributions.
Tax deductibility of super contributions – currently a person may only claim a tax deduction for personal super contributions if they derive less than 10 per cent of their assessable income (+ reportable fringe benefits and reportable superannuation contributions) from employment.
The budget proposes that anyone under the age of 75 will be able to make tax deductible personal contributions, irrespective of their age or work status. This change is proposed to take effect from 1 July 2017.
However, consideration needs to be given to the concessional contribution cap, and any employer contributions that may also be made. Furthermore, a tax deduction for personal contributions cannot create a carried forward tax loss.
Non-concessional contribution lifetime limit – current limit is $180,000 per annum. The budget has proposed replacing the current non-concessional cap with a lifetime limit of $500,000.
Even though legislation has not been introduced, it is proposed this change will take effect from 3 May 2016. And, to complicate matters even further, any non-concessional contributions made since 1 July 2007 will be assessed against the lifetime cap.
Extension of tax on super contributions for high income earners – Australians earning more than $300,000 currently pay an additional 15 per cent tax on their concessional superannuation contributions, bringing the total tax rate to 30 per cent. This is referred to as ‘Division 293 tax’.
Effective from 1 July 2017, the threshold will be reduced from $300,000 to $250,000.
Super pension limitations – Money transferred to the pension phase of superannuation is concessionally taxed. That is, a superannuation fund pays no tax on the income it earns on investments that are supporting pension payments.
In the budget, the government announced restrictions will be placed on the amount that can be held in the pension phase of superannuation. The proposed limit is $1,600,000. Amounts in excess of this will need to either be withdrawn from super, or may be retained in an accumulation account with investment earnings being taxed at 15 per cent.
This proposal is retrospective in that people already drawing income from a pension that has a value of more than $1,600,000 as at 1 July 2017, will need to transfer the excess over $1,600,000 back to an accumulation account.
Anti-detriment payments – An anti-detriment payment is an additional benefit that may be paid from a superannuation fund on the death of a member, where the benefit is paid as a lump sum to an eligible dependent beneficiary. It is proposed that anti-detriment payments be abolished from 1 July 2017.
Transition to retirement pensions – It was expected that the budget would introduce restrictions on the use of pre-retirement, or transition to retirement (TTR) pensions. The approach the government has taken on TTR pensions was not as expected.
From 1 July 2017, the investment earnings derived by a super fund that is paying a TTR pension will not be tax exempt to the super fund. Investment earnings of the super fund will be taxed in the super fund at a rate of 15 per cent, instead of the current 0 per cent.
Conclusion
The initiatives announced in the budget are subject to successfully passing through parliament and with an election looming, the success of any of these making it through the legislative process is uncertain at this stage.
However, most of the initiatives announced do make sense despite what some commentators might have said. Certainly, a number of measures are on the harsh side, but we will have to live with those.
The key message at this point is to keep calm. With most of the announcements, we have over a year to digest the implications and develop alternative strategies, where appropriate.
Source: Treasurer Scott Morrison budget speech
What doesn’t kill you…
/in Financial Advice General Info /by Shellie FisherLast Friday on my drive home from work, while sitting in the usual afternoon traffic snarl and listening to the radio in my car, I was shocked by a news story regarding the death toll from traffic accidents during the Thai New Year celebrations – 397 people in just seven days.
To put this into perspective – during the month of March this year 112 people died on Australian roads.
My curiosity level was heightened. Which country in the world had the worst record when it came to road safety? As per usual this situation called for the (presumed) source of all knowledge; Google and Wikipedia.
The World Health Organisation statistics reveal that 1.25 million people died worldwide in traffic accidents. China tops the list with a staggering 261,367 fatalities; which is followed by India with 207,551.
Yes – I realise that these are the two most populated nations on earth, so naturally you would expect them to have the highest totals.
So I went a little deeper to try and find a figure which would reflect a more accurate picture of the situation, and gain a snapshot that also considers the nation’s population as part of the equation. I then stumbled on series of figures based on road deaths per 100,000 of the total population.
China and India, according to these figures, were in fact not as bad as they first appeared (in terms of statistic averages).
They were both close to the worldwide average of 17.4 deaths per 100,000 people.
Thailand, on the other hand, was not good at all with a figure of 36.2 people. Australia stood out with a figure of 5.4, which was nearly half of that in the United States at 10.6.
But where was the most hazardous place to drive? Without a doubt it was Libya, with a staggering
73.4 road deaths per 100,000.
On the journey of life; death in a traffic accident is just one of the obstacles you are hoping to avoid.
The other ‘obstacles’ which dominate our media headlines include murder, wars, civil conflicts, and terrorist attacks.
According the United Nations Office of Drugs and Crime – 437,000 people worldwide were murdered in 2012 (this is the most recent data available at the time of writing).
This figure equates to a global average of 7.6 people per 100,000. Australia – once again – is very low with an average figure of 1.1.
Jamaica and the Bahamas (both islands I would like to visit one day) have figures between 30 to 39 people per 100,000.
Conflicts and war on the other hand, according to the International Institute of Strategic Studies, accounted for approximately 180,000 deaths across 42 different conflicts in 2014.
In the same year – the Global Terrorism Index stated that 32,658 people died in terrorist attacks. From this figure 78 per cent of these deaths occurred across five countries including Afghanistan, Iraq, Nigeria, Pakistan, and Syria.
So – what is the biggest cause of people dying on a worldwide basis? Surprisingly it is internal over external causes that are the biggest ‘obstacles’ you will face.
Cardiovascular disease killed 17.5 million people in 2012. That means that three out of every ten deaths were due to heart disease and stroke.
Out of the ten leading causes of death in the world, nine are health related, and road death is actually second last on this list.
Wars, murders, and terrorist attacks don’t even make the top ten – they are a long way down the list.
So, in Australia, the reality of someone’s situation is that dying in a road accident, war, conflict, or being murdered – shouldn’t be your biggest concern.
While I cannot predict the future – the biggest obstacle the majority of the population will face on the path to a long and healthy retirement is the choices you make in relation to your health and lifestyle.
Retirement is not an excuse to become lazy and complacent. You may not have the responsibilities of work anymore, or a growing family, but you do have a responsibility to yourself to not waste this precious time you do have and to look after your own health and wellbeing.
Remember to remain active for as long as you are able to. Stimulate your mind, eat well (lots of fresh fruit and vegetables is my tip!), always try to remain positive; don’t dwell on the negatives or the mistakes of the past; enjoy your life, and the remaining time you have.
As you embark on your journey into retirement and the next phase of your life – these factors should be your highest priorities and concerns.
Source | Mark Teale, Manager – Technical Advice
Centrepoint Alliance
For the Term of your natural life
/in Financial Advice General Info /by Shellie FisherRemember the good old days? When you could put your money with a bank and receive a real return? That simple experience is drifting further and further away from Australian investors today. Interest rates continue to fall and the press celebrates the effects on borrowers, forgetting about Australian savers and investors who rely on interest income to live. What’s more, banks are now putting more and more barriers around those deposits. The term deposit game is genuinely changing.
Term deposits in the global financial crisis…
As we’ve previously written, much of what is currently occurring with term deposits can be better understood if we first reflect on the events of the global financial crisis (GFC). On 15 September 2008, Lehman Brothers, one of the oldest and largest investment banks in the United States, collapsed and filed for bankruptcy as a direct result of its investment in highly complex, derivative assets. This was the symbolic epicentre of the GFC and was followed by years of dislocation in markets and economies across the world.
The Australian financial system had substantial potential exposure to the effects of the GFC. Our major banks were funding less than half of their balance sheets from domestic deposits and were heavily reliant on international financial markets. The GFC sent shockwaves through these markets, as the world’s banks wondered nervously which of their counterparties would become the ‘next Lehman Brothers’.
The response from the Australian government came on 12 October 2008, when it announced that it would guarantee deposits made with Australian banks. In effect, it was telling the world that – even if an Australian bank became the next Lehman Brothers – the Australian government would ensure that depositors would be repaid in full. This guarantee covered both wholesale deposits (until 31 March 2010, when the wholesale scheme closed to new liabilities) and retail deposits (currently still in force, but only to a total guarantee of $250,000 per retail account).
Simultaneously, the Australian banks reacted to reduce their exposure to the international money markets that had proved to be so vulnerable to panic. Their primary tool was the offering of higher interest rates on deposits. This ushered in a golden period of deposit interest rates for Australian investors. Each day it seemed that a new bank was offering a new interest rate special. Even as the official cash rate decreased in response to the economic effects of the GFC, bank deposit rates continued to climb. At one point, it was possible to secure a five year fixed term deposit rate at major Australian banks for 8% p.a. Times were good indeed.
… and the inevitable decline…
Of course, this was all too good to last. The banks were successful in rebalancing their funding mix and retail deposits had become a very expensive source of funds. In response, they began to reduce the rates that they were paying their depositors. This process was inexorable and largely independent of movements in the official cash rate. Indeed as the following graph shows, the story of the last four years has been the story of the reduction in retail deposits rates.
The situation for term deposit investors is now dire. Rates are barely positive in real terms – meaning that investors are struggling to keep up with inflation, let alone to generate surplus income on which to live. What is more, consensus projections for interest rates are that – far from recovering – interest rates are likely to remain stable or even decrease further in the months and possibly years ahead.
New regulations making it harder for term deposit investors
The Australian government and banks were not the only institutions reacting dramatically to the GFC. In Basel, Switzerland, the world’s oldest international financial organisation, the Bank for International Settlements (BIS) coordinates discussions between the world’s central banks (including our own Reserve Bank of Australia) in an endless quest for financial stability. The BIS hosts the highly influential ‘Basel Committee’, which is the primary global standard-setter for prudential regulation of banks.
The Basel Committee’s responses to the GFC came in the form of a comprehensive set of reform recommendations known as ‘Basel III’ (superseding the Basel II regime). These recommendations affect how banks manage their capital and liquidity. And these recommendations are affecting Australian term deposit investors right now.
Many investors have already informed us that they have received unusual notices from their bank. As term deposits come up to maturity, many banks have been writing to their depositors to notify them of ‘new terms and conditions’. In short, the new terms and conditions generally require that investors give 30 days’ notice to banks if they wish to take out money from a term deposit before maturity. Sitting behind this change are the Basel III liquidity requirements that seek to ensure that banks have stable and liquid funding structures to deal with any future financial crises.
Whilst these regulations may be sensible from a financial system point of view (and our view is that they are), they are just another obstacle for poor, battered term deposit investors.
What are the alternatives?
Given all of this, it is hard to see a sensible case for substantial exposure to term deposits for most investors. Whilst they are a good source of capital protection, their low rate of return means that portfolios will, at best, just keep up with inflation.
Therefore, investors are forced to look further for income producing investments. Bonds are a traditional option, but there are fears that they are experiencing a price bubble that could burst at short notice, leaving investors with substantial capital losses. Hybrid notes have been popular in some circles, but their complexity makes them unsuited for most investors.
Then there are equities. This has been a very popular strategy for some years, as investors chase dividends and franking credits. But with many analysts assessing the Australian stock market as over-valued, capital value remains at risk.
Source: Randal Williams, Chief Wealth Management Officer & Chris Andrews – Head of Funds Management, La Trobe Financial Asset Management Limited
What will the 2016 budget hold for pre-retirees?
/in Financial Advice General Info /by Shellie FisherIn recent weeks, the media has been overrun with commentary about what the 2016 federal budget may contain in relation to superannuation.
But this year – things are a little different.
The Australian Federal Government has already departed from convention by bringing the budget forward by one week. The budget is usually brought down annually on the second Tuesday of May. But this year it has changed, and will be delivered on 3 May 2016.
To add an additional layer of complexity to these proceedings – 2016 is an election year. Prime Minister Malcolm Turnbull was quoted in question time today (and at the time of writing this article) that 2 July 2016 is the most likely date for the election.
Over the past ten years a popular strategy employed by many Australians has been affectionately referred to as ‘Transition to Retirement’ (TTR).
Recent media commentary suggests that this strategy may be in the firing line for change, or even abolition, in the budget.
So – let us unpack TTR and see what all the fuss is about.
Back in 2005 Australia was suffering from a skills shortage. As a way to slow down the departure of skilled Australians from the workforce the government introduced legislative reforms that enabled people to progressively transition in to retirement, and allowed them to access superannuation so they could supplement their income.
TTR is simply an opportunity that allows a person to access their superannuation benefits in the form of a pension, rather than a lump sum, once they reach their preservation age. You don’t have to have retired, or even to have reduced your working hours, in order to commence a TTR pension.
As a result of the TTR opportunity being introduced – many people continuing to work full-time took advantage of the opportunity to start drawing upon their super, and consequently used the extra income for other purposes.
If the current rumours suggesting that the government may abolish TTR prove to have substance – I believe it would be regrettable. A far more palatable response would be to limit the access to TTR to those who are genuinely transitioning into retirement.
That is – I would recommend restricted access to TTR to only those who are working less than approximately 30 hours per week.
The reason why the government may be looking to amend the TTR pension is not due to its original premise – but rather – it is likely to be because of a strategy that is run in conjunction with TTR.
For many financial advisers and their clients, TTR is the marriage between TTR (accessing super from preservation age) and a second stand-alone strategy; making additional contributions to superannuation under a salary sacrifice arrangement.
This results in nice little piece of tax arbitrage – particularly for people aged 60 and older.
And therein lies the problem!
I don’t believe the government is concerned about TTR per se, but my guess is that they are alarmed about the ability of individuals to make significant contributions to superannuation (up to $35,000 this year).
Both sides of politics are concerned that the current, concessionally taxed, superannuation environment favours the wealthier members of our community, and that tax concessions would be better directed towards those in greater need.
To put this in perspective – when a person sacrifices part of their wage to superannuation, the contributions are taxed at a rate of 15 per cent. If that money was paid as a salary it would be taxed at the person’s marginal tax rate which may be as high as 49 per cent.
From a government’s perspective the simplest way to manage the perceived tax advantages that arise from a TTR/salary sacrifice strategy would be to reduce the amount that may be contributed to superannuation under a salary sacrifice arrangement.
This could be achieved by simply reducing the cap on concessionally taxed superannuation contributions.
But who knows what a government might do? The answer will no doubt be revealed over the course of the coming weeks in Australian politics.
Please note: Readers who have reached their preservation age should speak with their financial planner as a matter of urgency. If a TTR strategy is appropriate it might be advisable to have it in place before 3 May 2016.
Source | Peter Kelly – Technical Advice
Centrepoint Alliance
Household and Housing Debt reach new record highs
/in Financial Advice General Info /by Shellie FisherEach quarter the Reserve Bank (RBA) releases its selected ratios of household finances. The latest data for December 2015 shows the ratio of household and housing debt to disposable income has continued to climb.
The latest ratios of household finances highlight that the ratio of debt to disposable income is at a record high however, the value of household assets is also at a record high level. Meanwhile with record low interest rates, the ratio of interest payments to disposable income is the lowest it has been since early 2003.
The first chart highlights the ratios of housing and household debt to disposable incomes and plots it against standard variable mortgage rates. The ratio of household and housing debt to disposable incomes are each at historic highs of 186.3% and 133.8% respectively with the ratios increasing by 3.4% and 4.3% over the past year. Over the period from 1988 to 2015 standard variable mortgage rates have fallen dramatically and that has surely contributed to household’s preparedness to take on more debt.
Ratio of household and housing debt to disposable income
vs. standard variable mortgage rates
To further highlight this point, the second chart looks at the ratio of household and housing interest payment to disposable incomes. Over recent years the ratio has been falling with the ratios for households and housing sitting at their lowest levels since 2003. The higher ratio of interest payments currently compare to 1988 when interest rates were substantially higher is reflective of the much higher cost for household assets, particularly the cost of residential housing.
Ratio of household and housing interest payments to disposable income
Although households have significant debt, particularly for housing, the value of the assets they hold is substantial. The ratio of household debt to disposable income is currently 186.3% however, the ratio of household assets to disposable income 862.8%, the highest it has ever been. Similarly, the ratio of housing debt to disposable income is 133.8% however, the ratio of housing assets to disposable income is 471.3%. Interestingly, the ratio of household assets to disposable income is still lower than its previous peak in December 2007 at 476.2% but it is nudging back up towards its previous record high.
Ratio of household and housing assets to disposable income
The value of households’ assets are significantly greater than the value of the debt and this is highlighted in the fourth chart. Based on this data, the ratio of household debt to assets is 21.6% and the ratio of housing debt to housing assets is 28.4%. The chart also shows that the ratios have been trending lower recently although the housing assets to debt ratio increased slightly over the December 2015 quarter due to weaker home price growth.
Ratio of household and housing debt to assets
Australian households are heavily indebted, with most of this debt due to residential housing. While the debt is high, the value of the assets held is much greater than the debt. A few things which are important to consider however, are that this is a national view and across different regions the ratios are likely to be substantially different. Furthermore, lower interest rates and a fairly strong labour market over recent decades has contributed to Australian’s preparedness to borrow. Were either of these factors to change it could lead to a dramatic deterioration in the value of these assets while of course the debt would remain. Importantly, mortgage arrears remain low and the Reserve Bank has reported that the typical mortgage holder is currently more than two years ahead on their mortgage repayments. This coupled with higher rates of household savings provide a potential buffer if unemployment were to rise sharply or interest rates began to increase.
Source: CoreLogic by Cameron Kusher