The State of Household Debt

April 15th, 2016
Household debt is rising in Australia, with private debt levels now much higher than they were before the global financial crisis. While government debt gets most of the media attention, companies and households borrow four times more than governments as a percentage of GDP. According to a recent report by LF Economics, Australian households now have more debt compared to the size of the nation's economy than any other country in the world. While private debt is not necessarily a bad thing, it can cause serious problems if interest rates rise or global conditions decline.

According to LF Economics' analysis of national statistics, Australia had around $2 trillion in unconsolidated household debt at the end of 2015. With GDP at $1.6 trillion, the household debt to GDP ratio currently sits at 123.08 percent - the highest in the world. While Denmark has long held the top position, its de-leveraged property market combined with the housing boom in Australia has given birth to a new leader. Other than Denmark and Switzerland, both of which have negative interest rates, no other country comes close to the private debt levels of Australia.

To offer a comparison, the United Kingdom has an unconsolidated debt to GDP ratio of 85.9 percent, and the United States has a ratio of 79.1 percent. France and Germany are even further down the list at 56.2 percent and 53.8 percent respectively, with India and Argentina living with the least debt at 9.5 percent and 6.1 percent respectively. Rampant house price inflation is mostly responsible for private Australian debt, with housing prices having risen by a massive 141 percent between 1996 and 2015.

Household debt in Australia is closely tied to the housing market, with private debt partly due to credit cards but mostly due to mortgages. While property-related debt is backed by real solid assets, it is also susceptible to housing market movements. The high share of interest-only loans on investment properties is a particular concern, with 2 in 3 investment loans interest-only compared to 1 in 4 owner-occupier loans.

According to prominent Australian economist Steve Keen, Australia is one of seven countries "most likely to suffer a debt crisis" within the next three years. After analysing private and public debt data compiled by Switzerland-based Bank of International Settlements, Keen puts Australia second on the list behind China, followed by Sweden, Hong Kong, South Korea, Canada, and Norway. According to Keen, Australia meets the two key criteria for recession, with debt exceeding 1.5 times GDP and the level of private debt having grown by 20 percent over a five-year period.

Fears of recession may be unfounded, however, with Capital Economics' chief Australia and New Zealand economist Paul Dales recently saying the risks of a debt crisis may be receding rather than rising: "Since 70 per cent of that is made up of housing debt, it all boils down to whether or not you believe that the rise in housing debt is built on shaky foundations... [the debt to GDP ratio] doesn't take into account the cash that households have in offset accounts. Many borrowers have taken advantage of the fall in their mortgage payments triggered by low interest rates to raise their savings in offset accounts. This effectively means they are paying down their mortgage faster than required."

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