Why Australia’s record household debt is dangerous

By Leith van Onselen

It seems Michael Pascoe’s move to the New Daily, after getting dumped by Fairfax, hasn’t stopped the housing spruiking. Yesterday, Pascoe penned another article lambasting us from the “Doom & Gloom Brigade” (DGB) for being concerned about Australia’s extreme household debt:

[Here’s a] graph that tells you a lot about the real story. Unfortunately it’s a little old, as the RBA stopped including it in the bank’s monthly chart pack, replacing it with the graph of gross debt and house prices.

What counts most about debt is its serviceability, rather than its absolute size. What this graph shows is that while our gross debt has soared, what it costs us in interest (as a percentage of household disposable income) is about as low as it has been in 14 years.

One is left to speculate about why the RBA would stop issuing this graph. It would be churlish of me to suggest it was because the bank was a little embarrassed about the obvious correlation of cheap money and sharply higher gross debt.

The ‘DGB’ (Doom & Gloom Brigade) will be quick to shout a couple of things at this point.

Firstly, the debt might look cheap to service now with interest rates at record lows, but when rates rise, it will hurt like hell.

‘We’ll all be rooned’

And, secondly, all this discussion is about the average household and averages hide a lot of reality. The average household might be doing fine, but there are plenty of people who have borrowed as much as they can that leaves them little leeway if their circumstances change.

On the first point, the RBA is fully aware of the risks, which is why rates aren’t going up here until wages are rising enough to be able to handle it. And, even then, rates won’t be rising much.

The RBA has already told us that when wages growth is hunky-dory again and the economy is absolutely tickety-boo, its cash rate should only be 200 points higher. The authorities already require banks to check that a borrower could handle another couple of per cent on their home loans.

Also, as the RBA minutes allude, much of the household debt is held by people who are fairly well off and can afford the risk anyway.

The DGB’s second point is valid. There are and will always be some people close to the edge who will suffer when things change – a job loss, sickness, divorce, perhaps dropping back from two incomes to one.

There also are property investors who bite off a bit more than they can chew when they find property prices don’t always keep going up rapidly.

But that’s capitalism – borrowing to buy a home can’t be guaranteed to be a painless and sure thing.

Pascoe might want to familiarise himself with the Bank for International Settlements’ (BIS) global data on household debt. Not only does it show that Australia’s household debt is the second highest in the world (behind Switzerland), and way above the other Anglosphere nations:

But also that that Australia’s average principal and interest repayments as a percentage of household disposable income – called the household debt servicing ratio (DSR) – is the world’s second highest, and again way above the other Anglosphere nations as well as late-1990s to early-2000s levels:

According to the BIS, the DSR is considered “a reliable early warning indicator for systemic banking crises”, whereby “a high DSR has a strong negative impact on consumption and investment”.

Moreover, despite Australia’s interest rates cratering to record lows, which has lowered interest repayments, the DSR remains very high, thanks to increased principal repayments. Therefore, should interest rates rise even modestly, then obviously Australia’s DSR would surge. And it wouldn’t take much to push it above the pre-GFC peak.

DFA’s Martin North has also taken Pascoe to task via YouTube:

North argues that while many households carry no debt and are not at risk of defaulting, there are a significant percentage teetering on the brink:

That is, some 30% of mortgage borrowers are in “stress” at current interest rates, representing around one million households:

Therefore, according to North, “it will be the marginal borrower that triggers problems down the track, as we witnessed in the US during the GFC”.

Michael Pascoe can spin Australia’s household debt situation all he likes. But at the end of the day, Australia’s debt explosion has left the nation – and our banks – in a precarious position if/when interest rates finally rise.

[email protected]

Leith van Onselen


    • “Average household debt 190% and 1/3 of households are debt free”
      Even as a conservative – that is a perverse statistic, 2/3 of the nation are debt serfs

      • This is Sparta ‘Straya! We will not stop until 130% of our population is in debt serfdom…. Oi oi oi!

      • looks liek the debt free guys arent buying ozemite. Mr Smith>
        “It is my melancholy duty to inform you that the decision has been made to close Dick Smith Foods Pty Ltd,” he wrote.
        He said he had created about $480 million for Australian farmers and processors, and given more than $10 million to charity.
        “In recent times, the only way we have been able to achieve sales at an acceptable level (that would allow our products to have shelf space) is by discounting so much that we are often losing money,” .

      • There goes the old school Aussie way of life.
        Our culture is dead,
        due to fk ed selfish Governments importing far to many immigrants,
        and no I’m not racist, probably should be though?

    • DominicMEMBER

      Of course, the 1/3 that are debt free can’t afford to feel smug: a $2m home can easily become $1m in short order. Prices aren’t locked in!

  1. Gotta love that debt hockey-stick – about the only place where you can see them hockey-sticks running wild!

    • A picture paints a thousand words indeed.

      Those at the right end of the hockey stick are goners. 150% of income required to service debt? That’s insane.

  2. “while many households carry no debt and are not at risk of defaulting, there are a significant percentage teetering on the brink”

    So, there are already many debt averse MB-type households around.

    Mission accomplished, folks. Nothing to worry about going forward.

  3. Jumping jack flash

    “On the first point, the RBA is fully aware of the risks, which is why rates aren’t going up here until wages are rising enough to be able to handle it. And, even then, rates won’t be rising much.”

    Aware of the risks?! hahahaha! If they were aware of the risks it wouldn’t have happened in the first place.

    What he fails to realise is that wages aren’t going to rise again until AFTER all the debt is repaid and all the gouging finally stops.
    But he is correct, after all the debt is repaid, and the gouging stops, and trickle-down starts up again, and wages rise again, then interest rates can also rise. And not before.

    And that will take around 30 years or slightly less.

    Before all the debt is repaid, any spare capacity caused by gouging the costs of living, or replacing labour with cheap imports is quickly taken by the people who have access to it first. They increase their own wages to pay down their own debt, and to counter their rising costs of living as the costs are gouged to create spare capacity so the top tier can repay their debt.

    The people who have access to all the money first have enormous piles of debt to repay too, you know. They’re just like any of us. Just people, doing what people do, borrowing enormous piles of cheap debt and handing it all over to the super-poor, property-rich retirees.

    Its a delicious economic death-spiral that will be hard to break out of because our amazing government of mental giants, has little to no control over anything that actually matters anymore, since they sold it all off years ago.

    • Ah! The “widow-maker” trade…. good luck!

      PS – the banks will continue to extremely profitable, unless there is a quite significant increase in defaults and booked loan write-offs, as a result of sale proceeds not recovering the loaned funds. And I mean systemically, across the board.

    • IIRC when it got too hot in the GFC they banned the shorting of banks…… Might be worth having a backup plan.

    • mikef179MEMBER

      I don’t know why we don’t have negative rates now. Just think how easier mortgage payments would be at -10%. House prices keep on increasing and interest rates could just keep decreasing. Perfect solution. Once you go below 0 there’s literally no limit to how low you could go.

  4. This is just a continuation of the narrative from a few years back. Interest rates low == housing is affordable. Its simplistic thinking and soothing words to the gullible that fell for it. Pascoe is one of the retards that looks 6 months in the future of the cost of debt and tells people it will be like this for the 30 years of the loan. The guy and his chort should be lynched.