IMF on why high household debt is a problem

By Leith van Onselen

The IMF has released a new working paper entitled “Excessive Private Sector Leverage and Its Drivers: Evidence from Advanced Economies”, which provides a quantitative assessment of the gaps between actual and sustainable levels of debt and identifies the key factors that drive excessive borrowing.

Below are some key extracts:

High private debt can have a substantial adverse impact on macroeconomic performance and stability. It hinders the ability of households to smooth consumption and affects investment of corporations. In addition, elevated debt levels can create vulnerabilities as well as amplify and transmit macroeconomic and asset price shocks throughout the economy. Excessive private debt increases the likelihood of a financial crisis, especially when it is driven by asset price bubbles fueled by lending. The subsequent deleveraging could be potentially disruptive for economic activity.

Long-term growth prospects deteriorate significantly following debt-related financial crises. Furthermore, the accelerated pace of private debt accumulation can lead to economic and financial instability, which often coincides with great risk-taking and poorly regulated and supervised financial sector. Finally, spillovers from private balance sheets to the public sector due to government interventions, either direct in the form of targeted programs for debt restructuring or indirect through the banking sector, weaken the fiscal position and increase interest rates. All the above factors may potentially compromise public debt sustainability…

In particular, low interest rates and unemployment along with high house prices tend to be associated with larger gaps in the case of household. This implies that policymakers should pay attention to excessively low interest rates and inflated house prices to avoid imbalances that may ultimately pose risks to macroeconomic stability.

…generous mortgage-related tax incentives that favor ownership over renting can induce excessive borrowing by households and boost asset prices which, as discussed above, are positively correlated with the sustainability gaps. Furthermore, such incentives have important distributional implications and can be costly in terms of foregone revenue for the budget.

While the IMF doesn’t specifically target Australia, it should. After all, we have the second most indebted household sector in the world and tower above other Anglosphere peers:

Australia also meets many of the risk criteria identified by the IMF, such as “excessively low interest rates and inflated house prices”. We also offer “generous mortgage-related tax incentives” that “induce excessive borrowing by households and boost asset prices”.

Now watch on as the IMF’s warnings are ignored by Australia’s regulators and policy makers.

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Unconventional Economist


  1. The RBA is already preparing for a “cashless” economy, using organized crime and tax evasion as an excuse.

    They are probably looking at a future of negative interest rates and bank bail-ins.

  2. Just shows how much liquidity is sloshing around the system. Why anyone in their right mind would want to lend money to this country on the basis of the chart is staggering.

  3. When you look at the graph, what you are seeing is a measure of new money injected into the economy. This isn’t asset price growth or increase in value due to productivity gains, but inflation. Sure, we don’t see it in the official stats, but we’ve being engaged in a private QE programme on a grand scale. Sadly, unlike government QE, the private QE lingers – someone has to pay it back sooner or later.

    We will drown because of it, sooner or later, as the IMF report so gently points out.

    • Jumping jack flash


      The hyperinflation this tsunami of debt has caused is clearly visible in property prices, if anyone cares to look. Hidden in plain sight, and conveniently excluded from any measures of inflation, at least from any that will affect the mechanism for setting interest rates.

      This exclusion of property’s hyperinflation from the official inflation statistic is one of the many ways that our various systems have been constructed over time, either consciously or unconsciously, to allow this whole thing to happen. We are left with a truly a remarkable system.

      The whole thing was gradually altered over time to allow the quickest and easiest way possible to get rich with the least amount of work possible.

      What is quicker, easier or more lazy than to get someone else to borrow a mountain of debt and hand it all to you?
      Instantaneous, unfathomable, riches without needing to lift a single finger.

      Furthermore, the system has been designed so the very act of someone borrowing a mountain of debt and handing it all to someone else will create capacity for more debt, for when the next person decides to do the same thing. Or, if new debt is not immediately created from this extra capacity, it will act to shore up the banks’ loan books. Remarkable! Simply remarkable!

      • +1 I’ve thought the same thing many times… Australia has remained prosperous despite being a nation of lazy bastards! Everyone wants a safe cushy “job” but in reality nobody actually wants to work hard or build a business (at least not a lot of folks I see). Compared with living in Europe or when I visit the US that is.

        I really applaud the folks here who do give it a go. It’s a much much harder way to eek out a living.


    Often, the assumption of such large debt agreements is due to FOMA, or encouragement by those one might ‘trust’ (parents, friends, Dutch uncles etc) and the very act of ‘qualifying’ some how stamps the deal and simultaneously confirms the borrowers are 100% ‘ready’.
    Many are not and quickly find themselves in a terrifying place as they struggle to cope with such enormous pressures and near limitless downside. Financial ‘troubles’ can destroy other aspects of life that would have been unharmed if such dangerous debt levels had been avoided.

    What we are seeing currently is raw speculation under the guise of ‘investing’; using the grocery money to buy scratchies or playing pokies.
    Most don’t ( yet) see the ugly reciprocal of ‘freedom and accomplishment’ through property. Everyone, including those that should advocate caution, are advising to double down. This is the ‘face’ of why so many take this leap of faith as the powerful ‘buy with debt’ extolled by nearly every aspect of contemporary Australian society powers forward; its immense momentum creating more ‘awe’ when it should be terror at what it’s eventual demise will produce.
    Even if things currently feel ‘ok’, the emotional burdens ( that polite company rarely discusses as it’s too close) can be crushing.
    Depression and anxiety, resentment, denial, stress, anger & fear, regret, shame and embarrassment are not unique but are very real states that most will experience on the rocky ( and long) road to property nirvana; if it ever arrives.

    The depth of this ‘set-up’ is breathtaking and downstream, there will be long-lasting trouble. Society’s aversion to debt ( at least until recently) was based on intimate knowledge on just how destructive it can be.

    • Know IdeaMEMBER

      The other psychological aspect of high debt that I witness is the submission to the system by people that would otherwise question the system. Debt – be it financial, social or otherwise – is really good for moderating aberrant behaviours … up to a point … after which it become slavery, servility and/or sycophancy … none of which are healthy.


        Good points Know! Those in my circle that carry massive debt loads can only ‘visualize’ their hand on the golden ring which has been promised to appear ‘soon’. The ideal soldier mentality if there ever was one to keep the carousel full of dutiful riders all aiming for the prize.

    • C.M.BurnsMEMBER

      cry me a river. sit in the food court of any shopping centre in sydney at lunchtime and you will soon have zero sympathy for all these petty little landlords and specufestors as they brag, boast and urge each other on to higher levels of personal debt to buy another property for the portfolios.

      fuck. them. all.

      • I totally agree but for everyone of these wankers there are nine struggling mum and dads who simply want to do the best for their family the only way Australians know how too.

        There is going to be a lot of collaterl damage when it goes tits up.

  5. and to make matters worse we have a relatively high negative Net External investment position as a percentage of GDP.
    And we have shuttered our car industry so have lost part of our resilience in terms of benefiting from a lower currency.
    Our international trade agreements screw our cities and manufacturing base in favour of our miners and agricultural asset holders.
    5 years to a banana republic!

    • C.M.BurnsMEMBER

      and the single biggest source of tourism – the qld coast and specifically the great barrier reef – is getting smashed by natural events and coral bleaching. no one wants to come to sunny qld after it’s been smashed by a cat5 cyclone and the reef is dead.

      so there’s that

  6. This is purely anecdotal,but l would be interested in seeing a graph of income level vs lottery ticket purchase,over the last 25 years.
    My impression 25 years ago was the only people regularly buying tattslotto tickets were really poor,desperate to get out of the grinding situation they were in. Now,almost everyone l know gets them. I know that’s a social change,but that elusive dream of financial freedom affects a lot of people with high incomes now.

  7. drsmithyMEMBER

    The good news is at some point our line is going to look like Ireland’s, right ?

  8. To be controversial and make a point.

    1. Foreign & migrant landlord owners of residential housing are far better positioned in servicing debt.
    Foreign & migrant owners basically buy low end established Australian housing to run massive scale sublet hostel bunk and mattress share.

    An average 2 bed unit will have often 8 to 10 people, several families or pretext temporary visa occupants. (We have 2.4 million temporary visa or tourist visa migrant guest workers living in such ‘private shared accommodation’ say 400,000 ex Australian dwellings in two capital cities. DHIA say that 98% rent in such arrangements. They are 45% of Australia’s ‘renters’ and over 70% of the ‘renters’ in our two capital cities.

    The foreign owner or onshore proxy will declare a ‘lead tenant’ to deny culpability & then declare a minimal rental income say $400, often claim negative gearing as well, then they collect the other 6-8 subtlet tenant income of $1,200 -$1,600 cash in hand.
    It’s a $25 billion industry : the core driver of the housing bubble and unaffordability issues.
    An average Aussie couple or family by contrast has nothing like this capacity in undeclared cash flow or reserve to service debt.

    2. Any further stress on the ability to service housing debt will accelerate the foreign / migrant purchase of Australian property.
    That’s obvious.
    The profitably of the foreign owned syndicate, purchase via onshore proxy migrant guest worker subletting
    model can withstand both a tripling of rate increase (and rents would rise but be spread over a much wider occupancy population) and reduced finance as they have access to offshore syndicate money.

    The answer is to
    1. Enforce occupancy control.
    Almost all of this subletting is highly illegal in contravention to building council fire safety and other rules. But the developers, building managers, councils and authorities turn a blind eye as they all know the implications of even a mild check or enforcement.
    We need a full suburb by suburb, block by block, building by building inspection and enforcement.
    We need every temporary and tourist visa holder to declare their place of renting and match this to the landlord owner declaration of occupancy and income.
    And the ATO brought in to collect back taxes on the tens of billions of undeclared cash in hand income and false negative gearing claims made.

    2. There will be massive crash in CBD and suburban modest dwelling values – as the lucrative rivers of untaxed undeclared sublet migrant guestworker cash flow income dry up.
    Over 1.5 million or more migrant guestworkers – all on pretext visas, all unskilled, almost all working illegally will be without their room share bunk or lounge room mattress.
    They all should be deported.
    No more 8 year old English 3 year visas or fake 457 or non NZ born sneaking in the NZ backdoor.
    That’s the root.cause issue.
    This solves a number of issues.
    # Housing affordability.
    # The degradation of our education system.
    # The congestion with no contribution (over half the 2.4 million migrant guestworkers on pretext visas work illegally and pay little or no tax.
    # The balance of payments with tax of tens of billions of undeclared cash income now due from the foreign syndicates and criminal migrant landlord owners.