Australian households have larger liquidity buffers than in the past, which can help service higher debt levels, according to new Reserve Bank research.
In a research discussion paper, The Rise in Household Liquidity, the RBA said the value of cash, deposits and equity holdings has grown strongly relative to income in recent decades and that, at an aggregate level, the value of household liquid assets matches the value of gross household debt.
“When debt is measured after deducting liquid assets, the trend rise in the household debt-to-income ratio in Australia has been much less significant and has, in fact, been falling since the global financial crisis,” it says.
“To the extent that more liquidity is associated with less financial stress, our results suggest that the higher ratio of debt to income has not made the household sector more financially fragile.”
Measured as months of disposable income at their disposal, household liquid assets have increased from around 15 months in 2000 to more than 20 months now.
In looking at why this has occurred, the researchers identified several factors. Because of higher house prices, potential home buyers are accumulating bigger deposits.
Indebted home owners are guarding against higher repayment risk by using offset accounts to build precautionary liquidity buffers.
The paper argues that the rise in household liquidity “is a side effect of the growth in housing prices and debt, and the trend decline in interest rates over recent decades”.
The paper says: “In a world of uncertainty, many home owners with mortgage debt value liquidity for precautionary reasons, given the potential for future income or consumption falls. Rising levels of mortgage debt, relative to income, make mortgage payments larger and the risk associated with any income shock also increases.
“Households have responded to this increased risk by saving more for precautionary reasons.”
Mortgage offset accounts and redraw facilities are features of the Australian mortgage market that are unusual by international standards, and these accounts make it easier for households to save through mortgage prepayment.
Growth in superannuation balances over time is also a factor (superannuation is considered a liquid asset in households where people are old enough to have access to their super savings).
According to the research, the increase in liquidity has been broad-based across the population, such that the share of liquidity-constrained households has fallen over time.
The proportion of so-called “hand to mouth” households has fallen from close to 30 per cent in 2004 to less than 20 per cent in 2018.
However, household liquidity buffers increase with the age of the household and with housing tenure.
Housing investors have the largest liquidity buffers among indebted households, and first home buyers the lowest.
The RBA researchers measured household liquidity using national accounts data from the Australian Bureau of Statistics. Household liquid assets are the sum of currency, deposits, bonds and equities in financial accounts.