Changing face of Australian debt

AUSTRALIANS once were a nation of savers. But next month the Bureau of Statistics will tell us that households owe $1 trillion in debts and other liabilities, making us world-class debtors.

Our debts are now seven times the $136 billion we owed in 1988, when the bureau began counting.

Even since 2001, in five years, we have doubled the amount we owe: mostly to banks that borrow the world’s savings and lend them to us.

Australia’s transition to a nation of debtors has been one of the most profound economic changes in our history ó and we don’t know how it will end up.

Optimists point to soaring asset values and rising net wealth to argue against any concerns. Australians, they say, are not borrowing their way into trouble, but becoming financially more sophisticated: borrowing to buy assets offering bigger returns.

While household debts are now $1 trillion, household assets are now $2 trillion. We are growing wealthier, with our net worth in financial assets ó mostly superannuation, plus shares and bank deposits ó doubling since 1996 to $1 trillion. Add the soaring value of our real estate, and you see why we feel rich enough to borrow.

Once, we borrowed if we didn’t have enough money. Now, increasingly, we borrow because we have enough money to be comfortable taking on debt.

Studies show the largest share of debt is owed by the richest 20 per cent of households. Many are borrowing to take advantage of Australia’s generous tax rules for investors. But the pessimists argue that soaring debt makes households vulnerable when times get tough. Our eight million households on average now owe $125,000 each. We spend 11 per cent of our take-home pay just to pay interest on our debts ó way above the 9 per cent we paid in the high-interest days of 1989-90.

That will get far higher. Reserve Bank governor Ian Macfarlane told The Age this week that household debt could grow a lot more yet. Only one in three households has a mortgage, and many are not large. On the banks’ lending criteria, that debt could double again in a few years, making this the most highly-indebted nation on earth.

Mr Macfarlane is both optimist and pessimist about the debt. On one hand, the Reserve’s research suggests that, by and large, households have borrowed sensibly, and lenders have been mostly prudent. While there are signs that both are now taking on more risk to get more yield, a crash is unlikely.

Mr Macfarlane’s real concern is what the debt might do to the economy. The next shock that hits us, he warns, could be made much larger by households cutting back sharply on spending to protect their investments.

In 1990-91, he said, household spending held up despite crashing business investment, ensuring that the recession was relatively shallow. “What I fear is that next time the household sector won’t be the same source of stability,” he said. “The household sector might tighten its belt, really very sharply.”

Another concern is that the value of our housing assets rests on global markets’ willingness to keep lending us $50 billion a year. Our growth in spending is being funded mostly by growth in borrowing, only secondarily by growth in income. What would happen to housing prices if the foreign money stops?

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