From the Madometer today:
At the simplest level, household debt has been at a record for the better part of a decade. Household debt to disposable income actually seems to have hit a peak of about 150 per cent in 2006. From there it hasn’t done a lot, just bounced around that figure which may, on the face of it, offer some support to the idea that we’ve hit a debt wall.
Except that this argument could have been used in any year since records began. The truth of it is that debt has made new records nearly every year since. In fact, the idea that consumers had hit a debt wall was also being pushed back in the early noughties, when the debt ratio was just under 100 per cent.
So if household debt to income is always at a record, what’s so special about a debt ratio of 150 per cent? Why should that level constrain consumer spending, or open the door to peak debt, when a ratio of 100 per cent didn’t. Why not 120 per cent?
Why not 900%? Two reasons:
- to sustain this level of debt, Australian banks must continually increase their offshore borrowings. That’s fine if your job is only to support confidence in further debt accumulation, but if you’re a regulator charged with financial stability then ever increasing offshore borrowing is an ever increasing risk of a sudden financial crisis, and
- thus regulators are loath to see debt ratios get any higher after the GFC made it clear that to do so also means implicitly that banks are making private profits based upon public risk.
And so, we find ourselves more or less at peak debt, as the Madometer so excellently signals.
