Australian household debt “out of control”

By Leith van Onselen

In December, I showed how Australia’s ratio of household debt to GDP had hit 123% of GDP – the third highest in the world – according to data released by the Bank for International Settlements (BIS):

ScreenHunter_16670 Dec. 13 07.13

Martin North also compiled separate data from the BIS, which showed that Australia’s household debt servicing ratio (DSR) is also the third highest in the world:

Despite record low mortgage rates, Australia’s mortgage slaves are still sacrificing a far higher share of their income to pay mortgage interest (let alone principal) than when mortgage rates peaked in 1989-90:

ScreenHunter_16672 Dec. 13 11.05

Like lead in a saddle bag, these monstrous debt loads are beginning to act as a dead weight on households and the economy, with calls to financial helplines increasing, mortgage arrears on the rise, lenders’ bad debt provisions increasing, and personal insolvencies tracking near an all-time high. From The Age:

“It’s steadily out of control — I don’t know of too many financial counselling services where demand doesn’t exceed supply,” said Fiona Guthrie, chief executive officer of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. “There are more people who have got mortgages that they can’t afford to pay”…

Counsellors at the National Debt Helpline deal with such problems and are now even getting calls from property investors, said Guthrie. In the last quarter of 2016, phone calls to the service jumped 12 per cent on the previous year to an average 11,079 per month, she said. That’s double the rate of increase of the same period a year earlier…

“There’s so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it,” said Gareth Aird, economist at Commonwealth Bank…

Moody’s Investors Service and S&P Global  have both said that 30-day arrears on Australian mortgages packaged in securities they track are at multi-year highs…

ANZ chief executive Shayne Elliott said in November he saw “emerging signs of stress” in the economy, citing both households and small businesses.

With house prices in Sydney and Melbourne entering their sixth year of expansion, the wheels are unlikely to fall off just yet. But judgement day is likely to arrive in 2018 as the economy faces the fallout of several likely headwinds, namely:

  • Unwinding of the epic apartment construction boom;
  • Closure of the car industry;
  • Cratering of mining investment; and
  • Peaking of house prices in Sydney and Melbourne, as well as nationally.

Add to these the possible loss of Australia’s AAA credit rating and deepening political instability, and the economy’s future does not look pretty.

[email protected]

Unconventional Economist


  1. “But judgement day is likely to arrive in 2018”

    Are you confident enough to short the banks in the MB fund? xD

    • It was supposed to arrive in 2016, 2015, 2014, 2013, 2012, ….

      According to the Macrobusiness Gospel, judgement day is always coming next year. When it does not, it’s the year after that. Wash, rinse, repeat.

      • Its not about when it happens. There are so many forces that allow the can to be kicked. It more about the underlying macro economic factors that lead to a correction. We can not predict with certainty when it will happen however the underlying factors are showing that the levers that the can kickers have are becoming less effective, so while it is not inevitable, wouldn’t you be prepared for when a certain event sees it all fall apart?

      • ‘Strue!

        Spot on Beel, my friend

        House prices are up at least 50% since I first read ‘don’t buy now!’ in MB.

        I’ll have to get me one of those MBometers (’embee-ometer’)……….weeooooo…..weeooooo………

      • it’s not about when it happens….?
        So, 30 years down the track, and if there’s no crash, and it’s still “loooking like next year”, is it still unimportant? Or can we agree that the call was wrong

        I am not saying bears aren’t wrong (after 10 years of trying), I’m just saying it’s a bit silly to say that being wrong for 10 years means “it isn’t about timing”

      • You are right!
        But you are also wrong.
        Every speculation makes money to some.
        For most it will be:

        It may be difficult to find a short term better return anywhere other than RE but this was the case with other booms in their time and they all ended up in tears for most.
        Borrowing $1mil+ to buy into RE frenzy… well… you ought to be an investment shark

      • It’s a fool’s errand to make predictions like this but it’s equally foolish to believe that just because it hasn’t happened, it won’t happen.

        A collapse is baked in the cake. Pour yourself a drink and sit back.

      • Economics is the only profession in the world where you can be consistently wrong and still keep your job! If I made as many fuckups as economists do, I’d be unemployable!

      • You forgot 2001, 2002, 2003…. etc. I remember buying a house around 2001 for $200k and the doomers were confident a crash was around the corner. A waterfront block on the Gold coast was about $300k in 2000. Same blocks are being flogged off for $1m+ in 2017… If only I hadn’t listened to the doomers.. We lot are the biggest losers in the population.

      • It’s only gone on because firstly, successive governments have done all they can to prop it up and seeing that politicians have a combined property portfolio of well over $300m you can understand why. Secondly, Australia is yet to experience a significant external economic shock. Rudd navigated 2008 via, what was it, $8Billion of taxpayers money. When it does go it will be epic as debt is deeply ingrained in the Australian economy.

  2. Financial counselling don’t have too difficult a job. Their response should be pretty straightforward “if you can’t afford your mortgage, sell your house, take the profit and rent”.

    • ..coming soon.

      “Well, Mr and Mrs Farqduar ( counsellor histrionically drawing breath and then exhaling) I need you to listen very carefully. It appears that you have no equity ( anymore) and in fact are what we call ‘upside down’ to the mortgage where you owe more than the market value of the property(ies).”

      “I know this is shocking news to hear but it’s happening everywhere now- you are not alone.”

      ” You can cut expenses to the bone and try and hang on and hope things improve; or see if the bank will allow you to ‘go to market’ and apply anything received to the loan balance.” Their ‘legal team will be contacting you for sure and it can get ugly fast.
      You’ll be ‘on the hook’ for the shortfall. Do you have any super? Anybody in the family available to help? Mom or Dad?”

      • Rosy view … I’d recommend personal bankruptcy myself (unless you foolishly believed the market would ‘bounce back’)

  3. Record low interest rates =>Record high mortgage debt => Record high house prices
    It’s not a coincidence
    Ultra low interest rates are not a solution to the problem
    Ultra low interest rates ARE the problem
    Time to normalise interest rates….now

      • “—-agreed 10000000%. Under no circumstances can lowering any rates from this point be justified.”

        NO it can’t be justified — but they will lower just to save housing !
        Unless there’s marching in the streets.
        Hang on — Australians don’t do that . Too complacent. (stupid)

  4. What do the top countries on that chart have in common? Stupidly low rates inappropriate to the growth rate of their economies. Only difference is that Switzerland and Denmark have been forced into it by circumstances beyond their control (i.e. the ECB and the need to control currency appreciation). RBA has pushed and held rates at near zero real despite having quite healthy GDP growth. Why would anyone be surprised if debt balloons in response?

    • I also wonder if with the Swiss and Danes how much is being borrowed by households to make purchases in the EU zone? Holiday houses etc.

      • It would be irrational not to borrow heavily in those countries. At one point Denmark even had negative mortgage rates for some borrowers. Both have negative rates for depositors.

      • +1 Dan
        The cognitive dissonance ringing in their ears.
        The “experts” scream for lower interest rates and then are shocked and horrified when the punters act rationally, load up cheap debt and bid up house prices

      • Spot on Cormflakes. Both the Swiss and the Danes run pretty good CAS. Swiss run a fiscal surplus. All in all that means they are investing heavily outside the country and that basically accounts for the debt. Danes run a fiscal deficit and a current account surplus which means the private sector is saving and investing outside the country.

  5. I’ve just come back from a ‘fact-hiding’ mission from the UK looking into the issue of housing affordability and how good debt is for humanity.

    Let me tell you about debt.

    Everyone keeps asking me about the debt to GDP ratio. Well, people in Australian love debt. Australian banks make the best debt ever, and it costs them next to nothing. Who could of known? Smartest people in the room, bankers. People in the street keep saying to me “We need more debt!” and I say I hear you! We are going to create the best debt, the biggest debt – it’s going to make Switzerland and Denmark look like they should be auditioning for Biggest Loser. And you are going to say “Stop, it’s too much debt”. “We don’t need no more encouraging”. But we are going keep on indebting the joint. I heard from a hundred different people, there’s some really, really, really bad dudes out there talking down debt. We are going to find those dudes and build a wall around them – a very, very, very big firewall. And make them pay for it. Listen, you can never have too much debt. Not using debt is for losers. Are you a loser? Enough of whiny losers with their unaffordability housing and DGP ratios, let them eat smashed avo toast. We need winners, people prepared to use as much debt as possible. Debt is mankind’s saviour, I don’t know, but that is what people are telling me.

    • TailorTrashMEMBER

      Excellent Scomo ……..such clear logic gets my vote …………and tell that idiot in the parliament who uses your name to move over ……we need clear thinking sensible people like yourself in there ………..

    • I can get behind this novelty account. Just add a good avatar like reusa, I reckon poohat should do.

  6. Switzerland has a trade surplus of over 9000 USD per capita while we have a 3000 dollar deficit per head.

    flawse to comment please.

    • entirely correct Tony….not much to add. Both Denmark and Switzerland run significant CAS with Switzerland in excess of 11% of GDP. It gives them plenty to invest offshore.
      Re house prices as I understand between the US and the EU they are putting nigh on $2T (according to Doug Noland) into the world economy every year. Much of that ends up outside the borders of the host nations and ends up in places like Aus. The only thing we invest in is Sydney and Melbourne houses so that is where it goes.
      Hard to see the house prices dropping in fiat terms until those funds dry up and that not only does not seem close but is likely, under presssure, to expand.

  7. Come on..

    Unwinding of the epic apartment construction boom;
    Closure of the car industry;
    Cratering of mining investment; and
    Peaking of house prices in Sydney and Melbourne, as well as nationally.

    Retail is getting polaxed – absolutely shafted. The arrival of Alibaba and Amazon this year is going to be HUGE.

    Was talking with one of the heads of HR at ANZ the other day – they are SMASHING their staff harder and faster than you can imagine – laying them off thick and fast.

    Its happening – people are just holding on and they will for a few more months – but it has absolutely started.

    • Retail’s not the only sector getting polaxed. Mrs Nut has a number of small business clients who are saying that rents are now their single biggest cost.

      • Wing

        That’s what I’m seeing. Very tight in anything outside Real estate and building.
        The rent thing is just ridiculous.

      • Everytime I walk past a small shop or retail outlet in a westfield, especially when it is empty, my immediate thought is how much stock they need to move a week just to cover rent. Then I shake my head and wonder how they are still open.

  8. Given interest rates can be cut another 1.5%, there’s no reason prices aren’t going to Mars (since they’re already at the moon).

  9. wasabinatorMEMBER

    Savers (incl. myself) take note: You are the outliers. Your votes are too small to count, so you will be the only ones to suffer if this goes all pear shaped.

    • I’ve been banging on about this for the longest time: when the SHTF, expect bank deposit haircuts for the greater good.

      • I don’t think, no in fact i’m betting that won’t happen. I’ve got $200k in 1 bank account, to keep under the $250k cap. My other money is tied up in a European bank account and US equities.

        Just in case, but I doubt they will come for depositors, can you imagine the rage? I’d be out in the streets with a pitchfork looking for Glen Stevens lol..

      • Gavin
        Not the comment by Was. Savers don’t count and never have. Note the current BS from Central bankers to paint savers as THE problem. They don’t want savers when they can just keep on printing money.
        When TSHTF those in control are not going to give a stuff. You think the Greeks were less angry than we would be – especially since it was Brussels ordering the execution of the theft?

      • Mining BoganMEMBER

        After the apocalypse there will be some who can still borrow. However there will be no more foreign money on offer. Under this situation will deposit rates shift up to meet whatever demand is left?

        Or sheer wishful thinking?

      • First thing to say is I don’t know MiningBogan BUT……as long as the US EU and Euro can keep on printing it seems top me it can go on. On all the modern theories the Chinese economy should have collapsed a long time ago and the japanese economy a long time before that. Both countries have massive USD reserves for use as investment here and elsewhere.So it’s hard to see how we will run into a problem as long as we are prepared to sell everything off to pay for our consumer goods.
        Some day the whole thing will fall apart – but i’ve been watching it for 50 economically conscious years!

      • MB – also note the current nonsense of trying to cause inflation – for what purpose????? They think they can inflate the debt away. IMO they are going to be more successful than they can now dream at the inflation (stagflation) thing but the debt will keep on ballooning as it always has in a highly negative RAT interest rate environment.
        Note as observed by others current inflation is in house and other asset prices. I’m guessing that is where it will continue to go for some time.

    • There is a few trillion dollars worth of bonds that may vaporize in the not too distant future, that will make a difference to the status quo !

  10. I’m a saver/renter and my brother owns 3 properties (two of them investments). Both IP loans are now in interest only mode and I still have to frequently pick up the bill when we catch up for dinner these days. When this ponzi falls apart the reality will hit very close to home even though I’ve tried to have no part of it.

    • Prices will peak the moment that our politicians quit falling over eachother to sell us out to the CCP. My leading indicator will be going one month without a group of elderly mainlanders taking photos of every house in my leafy neighbourhood.

  11. If something’s not working viz, lowering interest rates, why continue with it? I’m not an economist by a long shot but it just seems like common sense to me.

    • Mining BoganMEMBER

      Oh, it’s working out as planned. The problem is that it’s not working for the good of Australia, but that aim was dismissed and shot a good while back.

    • TailorTrashMEMBER

      “Last year, an ABC investigation found struggling homebuyers are being forced into bankruptcy over mortgage insurance policies that many consumers believe are designed to protect borrowers.”

      This would be funny if it was not so sad ………people take out a million dollar mortgage and think their mortgage insurance will cover then when they meet that inevitable huge black financial hole that a million dollar debt will send them to …they sign up for the debt and the insurance and understand neither !….
      to quote Forrest Gump …..” stupid is as stupid does “

      • Mining BoganMEMBER

        That’s okay. Yesterday I was told by a real estate ‘expert’ that my low-balling rentals is useless because the owner can refuse, keep it empty and claim the rent on landlord’s insurance.


      The 2001 Australian Corporations Act is thousands of pages in length. Despite that magnificent ‘comprehensivity’, some very important protections never made the A list.

      WRT margin lending, there exists a requirement to ensure other access to liquidity exists for a retail customer who face a margin call to help try and keep the pin in the grenade. Often, the family home is the backing security so this makes sense.

      Analogously (except for the implied– but not legislated–though fully enjoyed ‘perception’ of a fiduciary duty), real property lenders are not bound by such trivial details. As you’ve shown clearly, most have no idea whose finger ultimately can pull the ‘pin’ and when.

  12. Conclusion: Fk every single buyer who borrowed to pay more than 3x HH income for their property/ies. No exceptions.

  13. With a trillion in debt, how much has the derivative market leveraged this debt and what impact would even a 10% correction have on the markets?