Australia’s “scary” household debt problem

The Australian’s James Kirby has belatedly discovered that Australians are drowning in household debt, and that this places the economy at future risk:

It must rank as one of the scariest numbers in the housing market, yet it’s rarely mentioned…

The figure is the debt servicing ratio for households [from the Bank for International Settlements] and right now, Australia’s national “number” is running way too high – it is almost twice the level of comparable “advanced” economies, such as the US, Europe and Japan.

Worse still, as NAB’s economics team puts it, the figure is “near its 2008 peak”…

NAB market economist Kieran Davies has noted… “New loans have picked up (and the BIS did not capture some of the more recent rate cuts) but weak incomes and already high levels of debt could constrain further borrowing. This is brought home by the fact that despite the lowest mortgage rates since the 1950s, the debt servicing ratio is near its 2008 peak”…

If this is not a concern, what is?… Set against miserable growth in household income, higher house prices or higher unemployment will strain the ability of households to pay even low rate mortgages even further.

The data James Kirby is referring to is shown below:

Despite cratering interest rates, Australia’s 15.5% debt servicing ratio (comprising principal and interest repayments) is the second highest in the world (behind Netherland at 15.7%) and dwarfs the other Anglosphere nations.

While Australia’s high household debt load doesn’t paint an immediate danger to the economy, given the reduction in interest rates and the resurgent housing market, it does represent a millstone around the economy’s neck that will weigh on consumption.

Moreover, given interest rates are near their lowest bound, it exposes Australian households to extreme financial risk if/when interest rates eventually rise (albeit a long-time down the road) or unemployment jumps.

The next external shock, whenever that comes, could provide the prick to Australia’s gargantuan household debt bubble.

Leith van Onselen
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