Why housing debt rises with income – and why businesses need a few bloody noses: Joye

Most of the people reading this column will be either employees of small and large businesses, or owners of these companies.

Yesterday I gave a one-hour speech to a seminar of 500 small business owners. As you might imagine, my presentation was chock-a-block full of economic analysis. If you want to have a look at some of the charts, you can view them here.

Today I want to highlight two – rather unrelated – things I canvassed at the seminar. The first touched on the distribution of housing debt among those owners that have a mortgage. The second was about the key lessons I have learned starting disruptive businesses.

Based on the latest available data, the RBA estimates that the total value of all Australian household debt to their assets is just 19.4%. So the absolute “debt-to-assets ratio” in the household sector looks pretty low. A company with this level of leverage would not be regarded as risky.

What about the level of gearing within the housing market? The RBA’s analysis puts this figure at about 30%. That is, there is circa $1.2 trillion worth of mortgage debt held against $4.1 trillion worth of private housing. Again, this looks good: it is around half the equivalent ratio in the United States.

But Chris, I hear you say, what about the level of indebtedness for those, and only those, with a mortgage? And how does this change according to age and income?

The RBA has kindly obliged and supplied this data as well. The first chart below tells us for home owners with a mortgage (i.e., excluding those who have paid off all their debt), gearing rises to a peak of 63% for those aged 25 to 34 and then declines steadily to a nadir of just 9% for those aged 65 to 74. Importantly, the median level of gearing across all home owners with mortgage debt is just 44%.

The second chart teaches us that the level of leverage in the housing market rises as a function of income. As you move rightwards along the x-axis you are migrating up the household income bands. The median home owner in the bottom 20% of income earners only has a debt-to-assets ratio equal to 22%. This then peaks at more than 45% for those owners in the top 40% of earners.

The second thing I shared with yesterday’s seminar (which I gave alongside Yellow Brick Road’s Mark Bouris) were the insights I had gathered through my own experience starting businesses. Hopefully there will be some practical take-aways here for those of you who are in the midst of building a new business, and those who are considering whether to make the leap.

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