How will household debt and mortgage stress affect the investor?

Household Debt
Total household debt, at the end of 2013, was calculated at $1.84 trillion or $79,000 for every Australian citizen, adult or child. The rate of household debt rose before the Global Financial Crisis (GFC) but is now rising much more slowly, at 2% per year. This compares to nearly 10% per year from 2001 to 2007.

Debt to Asset Ratio
Household debt is currently at 20% of household assets, a slight drop from 21% in 2011. For comparison, this number was only 11% in September, 1988.

Debt to Income Ratio
The 2013 debt to income ratio was 180%. The good news is that debt and income are growing at a near-equal pace and have been since the GFC hit.

Interest to Income Ratio
In 1959, Australians had a 3% interest to income ratio. In 2008, the number was 12%. Now, it has dropped somewhat to 7%.

Debt Sustainability Factors
Five factors are extremely important when deciding whether current debt levels are sustainable. Here is a look at all five.

1. Interest Rates
Since 75% of all household debt is for mortgages, that is the most important number. Currently, thanks to RBA interest cuts, home loans are being written at around 5% interest rates. In December of 1990, the number was closer to 17%. We don’t expect them to stay at 5% for much longer.

2. Unemployment Rate
Currently, the unemployment rate is around 6%. It is expected to rise to 6.25% by the middle of 2015, according to the RBA.

3. Real Household Income
This is basically household income adjusted for inflation. It actually rose from mid-2007 to 2012 and has gone back down a little since then. If the Productivity Commission and the Australian Treasury are correct, growth should be slower over the next ten years.

4. Real Household Wealth
This number was at a record high before the GFC took a chunk out of so many people. But at $323,000 per person at the end of 2013, it is close to reaching record levels again.

5. Property Values
At the end of December 2013, the average property value in Australia was $539,400 for an all-time high. Expect more of the same as it is still rising.

How These Statistics Affect Property Investors
We are concerned that the amount of household debt is causing mortgage stress for so many, especially those that overcommit as first home buyers. We think that most property investors are remembering the lessons the GFC taught us and are not over extending, only starting projects they can finish and keeping a savings or equity buffer.

However, whenever interest rates start to rise again we will likely see more homes on the market and a very good opportunity for property investors.

No matter what the future holds, it can be said with relative certainty that anyone who purchases an investment property now and holds it for at least two property cycles will be happy they did.

About Jarrad Mahon

Jarrad is the director of Investors Edge Real Estate.

Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their Perth property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.

His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.

Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.

A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.