The good debt, the bad and the ugly

AUSTRALIANS are well ahead of our US counterparts when it comes to good versus bad debt, but are we well-prepared to manage the risks?

Most household debt in Australia is actually good debt.

In 2016 it was reported that around 56 per cent of the debt was related to homes and land, while 36 per cent was associated with investments.

Around 93 per cent of borrowings are used to create wealth, well ahead of Americans at around 74 per cent.

Australia’s net worth after liabilities reached $9.4 trillion at the end of 2016 and the level of debt to the value of assets is around 20 per cent.

But it’s not all roses, as our debt is growing faster than our income and, as a nation, household debt outstrips our country’s Gross Domestic Product (GDP), the value of finished goods and services we produce in a particular period.

Exacerbating the numbers, GDP fell by around 23 per cent from 2013 to 2016, which was impacted by the commodities slump, while household debt rose. This will change over time as commodities improve.

It has been reported that people are moving into “mortgage stress” as they struggle to make repayments. Many Australians don’t have a good knowledge or understanding of the risks and how to avoid getting into trouble if asset values fall.

Therefore it’s important to consider the “what-if” scenarios and your options in the event something goes wrong, such as a loss of income, or a fall in asset values. LAST month it appeared the market had chosen a direction, although not with any real conviction. However, at the time of writing the bears still hadn’t taken full control as the All Ordinaries Index jumped back above 5760 points.

While the chart indicates the market isn’t in decline yet, we cannot assume it will rise from here.

This lack of clear direction since January 2017 is frustrating for traders. From time to time, there is uncertainty about the Australian economy, but we haven’t seen the market respond quite this way, therefore I believe the increase of computer-controlled algorithmic trading is likely to be having an impact on what is unfolding in the market.