Aus­tralia’s debt bub­ble bursts

We could all be af­fected by an eco­nomic slow­down if lenders cut back in re­sponse to fall­ing house prices

Money Magazine Australia - - WHAT IF? -

DO WE HAVE A DEBT BUB­BLE?

Bub­ble might be a tad emo­tive but suf­fice to say we are bor­rowed to the gills. House­hold debt has been steadily ris­ing in Aus­tralia for the past 30 years, even af­ter the GFC, which saw debt fall in other devel­oped economies.

Aus­tralian house­holds now hold debt on av­er­age of around 190% of house­hold in­come – one of the high­est lev­els in the devel­oped world. By com­par­i­son, Mor­gan Stan­ley re­cently put US house­hold debt at 101% of in­come, the UK at 125% and the euro area at 95%. Of the coun­tries sur­veyed, only Switzer­land (195%) and Nor­way (224%) had higher debt ra­tios.

Our debt-ser­vic­ing ra­tio was the high­est of the coun­tries listed, at 16% of in­come.

Mor­gan Stan­ley found Aus­tralia had the high­est risk of a fall­out from a re­duc­tion in bor­row­ings if lenders cut the amounts they are pre­pared to lend in re­ac­tion to fall­ing as­set val­ues and pres­sure from reg­u­la­tors to fur­ther tighten lend­ing stan­dards. With debt lev­els so high and sav­ings com­par­a­tively low, it es­ti­mated we could be hit by a $700 bil­lion cut in wealth if fall­ing house prices led to wider delever­ag­ing. In­sti­tu­tions such as the In­ter­na­tional Mon­e­tary Fund have warned about house­hold debt in Aus­tralia. It said house­hold lever­age was an area of con­cern glob­ally but par­tic­u­larly in Aus­tralia where house prices had in­creased. As a share of the lo­cal econ­omy, it pointed out, house­hold debt in Aus­tralia is at a record 122%, well above com­pa­ra­ble coun­tries.

HOW RISKY IS IT?

As usual, it comes back to the hous­ing mar­ket. Ac­cord­ing to Fin­der.com, owner-oc­cu­pied mort­gages make up around 56% of per­sonal debt with in­vestor debt (much of it in hous­ing) mak­ing up an­other 36%. It says the av­er­age house­hold owes around $250,000, though there are ob­vi­ously big vari­a­tions on ei­ther side of that.

Ob­vi­ously the more debt you hold, the more vul­ner­a­ble you are to fall­ing prices. Dig­i­tal Fi­nance An­a­lyt­ics es­ti­mates more than 1 mil­lion house­holds (or around 30% of house­holds with owner-oc­cu­pier home loans) are now ex­pe­ri­enc­ing mort­gage stress, which oc­curs when their cash flow does not cover on­go­ing costs. It says more than 40% of house­holds try­ing to re­fi­nance are hav­ing dif­fi­culty as lend­ing stan­dards tighten and they are ur­gently try­ing to re­duce their spend­ing.

Some house­holds have more flex­i­bil­ity than oth­ers. Around two-thirds of house­hold debt is held by higher in­come house­holds and lender ING re­cently found 82% of house­holds pay more than the min­i­mum on their home loan most years, though other es­ti­mates put the pro­por­tion of home loan bor­row­ers ahead on their re­pay­ments at around 70%. Oth­ers are dip­ping into their sav­ings to meet the gap.

THE BIG PIC­TURE

With wages growth low, house­holds have been dip­ping into their sav­ings to boost spend­ing. That is un­sus­tain­able over the longer term and a drop in con­sumer spend­ing would have a broader ef­fect on the econ­omy. If debt delever­ag­ing were also to oc­cur, that could turn into an eco­nomic slow­down.

The broader im­pli­ca­tions of debt delever­ag­ing would hit house­holds with heavy bor­row­ings first as they are the ones that might strug­gle to re­fi­nance or to meet their re­pay­ments. But fall­ing house prices and any drop in con­sumer con­fi­dence and spend­ing would have broader ef­fects on the econ­omy. In Septem­ber, Michele Bul­lock, the Re­serve Bank’s as­sis­tant gov­er­nor, said any dif­fi­cul­ties in the res­i­den­tial mort­gage mar­ket could trans­late into credit qual­ity prob­lems for the banks, with mort­gages be­ing such a large part of bank lend­ing. While our banks are well cap­i­talised and have al­ready tight­ened their lend­ing stan­dards, fur­ther tight­en­ing is not off the cards.

An­nette Samp­son has writ­ten ex­ten­sively on per­sonal fi­nance. She was per­sonal fi­nance edi­tor with The Syd­ney Morn­ing Herald, a for­mer edi­tor of the Herald’s Money sec­tion and a colum­nist for The Age. She has writ­ten sev­eral books.

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