Record Debts Threaten Australia

Debts across Australia have hit a record high of double household incomes and are still climbing, making it difficult for the Reserve Bank to raise rates and increasing the risk to the economy from any downturn in housing prices.

Reserve Bank of Australia analysis of the latest national accounts shows debt is 99.7% higher than the total earnings of all households, having risen from 67% three years ago. Households are still adding to their debts as new home buyers enter the market for the first time, established homeowners upgrade their houses and investors add to their property portfolios. Housing debts rose $110 billion, or 6.9%, in the year to November, AAP reported.

Although the Sydney market has cooled and rates have risen for investors, owner-occupiers are still being offered record low rates, with Westpac last week advertising special discount rates as low as 3.6%.

The bank’s analysis shows that despite record debts, spending on mortgages still accounts for only an average of 7.2% of all household incomes across the population, which is the same as in 2004 when mortgage rates were above 7%.

The bank has been concerned by the relentless rise of household debt that is among the highest in the advanced world. Governor Philip Lowe warned late last year that high levels of debt threatened the stability of the economy.

Wage income growth is rising at only 2% or less than a third the pace at which households are taking on new mortgages, so debts will continue to rise compared with incomes.

CoreLogic research director Cameron Kusher says that until now, the rise in debts has been matched by the rise in the value of housing assets. Over the past three years, Reserve Bank analysis shows housing assets have risen from a multiple of 4.1 times average income to a current level of 5.2 times income.

However, with the housing market turning, particularly in Sydney, households will see the value of their assets drop while their debts remain the same. “If housing is falling, it has the potential to have an impact in other areas like retail,” he said.

Kusher said it would be hard for the Reserve Bank to lift interest rates, given the elevated level of household debt that has made people more sensitive to interest rate changes. “If they start lifting interest rates for owner-occupiers, it can suck a lot of demand out of the market very quickly,” he said.