World Economy

Australia Warned of High and Rising Debt

The average housing debt is A$150,000.The average housing debt is A$150,000.

The OECD warned Australia on its debt levels in March. The IMF warned in October. Now the Bank of International Settlements has flipped on the alarms. That’s the whole set of global financial institutions sitting in the rear view mirror telling the Australian government to slow down.

The Bank for International Settlements turned on the flashing lights this week with a big report that outlined how far out of line Australia is. It grouped countries into those with high debt, and those with rising debt. Only a handful of countries were both high and rising, and Australia was both, news outlets reported.

The BIS is not opposed to debt. It’s a bank after all. But as the bank that has the central banks as its customers, it gets worried when debt builds up too high. It knows a country with a lot of debt is like a truck carrying a heavy load. If something bad happens, it has very limited ability to maneuver.

And something bad will happen. It might be a house price disaster, a financial crisis in China, a huge volcano going off in Indonesia or a war in North Korea. “High household debt can make the economy more vulnerable to disruptions, potentially harming growth,” says the BIS.

In Australia, three quarters of households owe something to the bank. The average housing debt is A$150,000 ($112,591). Australia’s debt is high. But the interest rates are low. Record lows in fact, with official rates at the never-before-seen level of 1.5%.

Banks set their mortgage rates by reference to the official interest rate, so the interest Australians pay on housing loans is currently low too. So far so good.

But Australia has really taken advantage of those low interest rates. Despite the low rates, Australians are already paying well above the long run amount of their income in interest repayments. Australians are paying 3% more of their income on interest than is historically normal.

If that’s not frightening enough, the interest bill is set to go up when interest rates rise.

The Reserve Bank of Australia points out that Australian household debt is not as bad as it seems, because they have a lot of money in mortgage offset accounts.

Australians are ahead on their debt repayments, it often claims, and shows a lot of data to prove it. The BIS has gone out of its way to make sure the reserve bank doesn’t get too cocky by pointing out that new mortgages, which are bigger and at higher risk of not being repaid, have much smaller buffers.

“In Australia, the liquid prepayment buffers on mortgage-offset accounts are heavily concentrated on older mortgages with less time to maturity, the BIS says.

Debt for investments that produce things and employ people is good debt. Debt for consumption or to bid up the price of unproductive assets is different.

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