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Deeper in debt

You would have to be living under a rock to not know that housing affordability in Australia has become THE property related issue of our time. We are constantly bombarded with stories from the media, both local and international, as well as numerous industry commentators proclaiming that up and coming generations will find it virtually impossible to buy their own home, and talking up the dire situation of many struggling with mounting household debt.

Recently, a report in The Sydney Morning Herald focused on concerns over growing household debt and placed the blame squarely on escalating house prices and the mad scramble by many to borrow more in an attempt to keep up.

The report says the share of debt free households in Australia has “plunged to a nine-year low”, according to data from a Melbourne Institute survey, which also reveals that only 36.2% of households were debt free in the September quarter, representing the lowest incidence of this since 2001.

With the current ratio of household debt to disposable income at record levels, there are growing concerns over an increasing number of consumers who are seemingly living beyond their means and heading into risky financial territory. Data from the Reserve Bank indicates that the ratio of household debt to income hit an alarming 159% in the June quarter, primarily due to higher mortgage debt.

Research fellow at the Melbourne Institute Edda Claus says the high level of debt is worrying and cautioned, “The big danger would be if people lost their jobs. If they’re very highly indebted then things can go very bad very fast.”

One of the biggest issues facing those already struggling with increasing debt is the threat of a 1.25 percentage point rise in interest rates that experts are tipping will come to fruition by the end of 2011; an increase of this magnitude would see a sharp rise in repayments for those already feeling the pinch of large mortgages.

Senior economist with JP Morgan Helen Kevans says that households are becoming “much more sensitive to interest rates,” because they have been releveraging to keep up with rising house prices, and thus taking on more and more debt.

With most experts tipping that a sharp decline in employment figures is unlikely any time soon however, Dr Claus says household debt at present is more of a potential problem rather than a pressing concern; ”As long as people keep their jobs, it should be OK,” she said.

With predictions of an imminent rate rise from CommBank’s chief economist Michael Blyth, who forecasts a 0.25% increase for October, the take home message for property investors and home buyers is to be prepared.

The best thing you can do is cover yourself financially by having a cash buffer in place that will protect you from the fallout of rising mortgage repayments, which now seems inevitable.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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