Today I’d like to have a rational look at the level of household debt in Australia.
I’ve looked at this chart a few times, to show why I don’t think households in Australia will leverage up much further.
Naturally, the increase in household debt levels since the late 1980s is largely a result of more mortgage debt, the trigger for which was low interest rates as well as banking deregulation.
150% – one of the highest levels of household debt in the world!
It sounds like such a shocking number, I guess, simply because it is a number which is higher than 100%.
[sam id=40 codes=’true’]
In many ways, though, the real surprise is that the number is not so much higher.
If you think about it, household debt of 150% of disposable income would be the equivalent of a couple with $60,000 in disposable income taking on a mortgage of $90,000 (and that’s ignoring all other household debt).
Given that mortgages tend to run for 25 or 30 years, how come the number isn’t so much higher than 1.5 years of disposable income?
One of the reasons is that so many homes have no debt against them at all.
The figure used to be around half of homes, and today it’s still more than a third of them in the two most populous states, as well as in smaller states such as SA and Tasmania.
With most of the household debt secured against housing, the Reserve Bank remains comfortable enough with the above chart (provided it does not start rising again).
Regulatory authorities will place far more emphasis on non-performing loans and the percentage of income which is spent on housing, which has fallen sharply along with interest rates.
The most important thing of all for Australia is that lending standards are maintained, for if lending standards fall then things can begin to unravel.
The US had its subprime loans, and in Britain it was far too easy to get a 100% mortgage in days gone by.
Not many lessons seem to have been learned though – in the UK, the government has introduced new schemes to encourage people with no track record of saving to buy housing.
We know how that ends, don’t we?