Jessica Irvine has penned a soothing piece on Australia’s world record household debt, listing a bunch of reasons why it is “safe”. From The Canberra Times:
Chicken Littles have been insisting for more than a decade that Australia’s debt ceiling is about to fall in…
The alternate approach is to ask what features of the Australian landscape have enabled us to shoulder a uniquely high debt level?
There are several.
Of course, it helps that we haven’t had a recession in 25 years and real household disposable incomes have risen steadily…
It also helps that house prices have risen, supporting household asset values relative to debt. There is a chicken and egg game going on here, of course.
…we have “full-recourse” loans…
By and large, it is in the hands of those who can most afford it, according to economist Saul Eslake…
So there are many reasons to believe Australian households are not as vulnerable to their debts as they appear on first blush.
There are elements of truth here, but also some fallacies.
First, real household disposable incomes have registered near zero growth over the past four years:
Average weekly earnings are growing at close to the lowest rates since the Second World War, which means our record high debt loads are not being ‘inflated away’:
And the argument that the debt “is in the hands of those who can most afford it” is cold comfort given Australia’s household debt profile is very similar to the USA’s just prior to its housing bust:
While I cannot find more recent matching data for Australia, the share of households with debt has not changed materially since 2006, suggesting the above relationships are still in play (see below chart).
In any event, Australia’s world record household debt loads do place the nation in a fragile position if/when unemployment rises and/or the country is hit by an external shock.
