Australia’s household debt-to-income level has reached a new negative milestone, hitting 200% for the very first time. Analysts have referred to it as “extremely elevated” and “one of the highest in the world.” So, what exactly does this mean? And what does it mean for our country? In our latest blog we explain.
What does this mean?
To put it simply, our total household debt has reached a record $2.47 trillion! That’s almost $100,000 for every man, woman, and child! Even after factoring in debt-free households, the statistics show that the average Australian household debt is now double their yearly earnings – This amount includes wages, welfare, and other sources of income.
How does our debt rate against other countries?
If you don’t know how other countries are doing with their household debt, it can be hard to grasp the significance of ours. So, how do we compare to the household debt of other countries?
The Bank for International Settlements (IBS) says Australia and Switzerland are the only advanced countries with household debts above 120 per cent of gross domestic product. This is approximately double that of most countries.
Australia is among a small group of countries where debts are not only high but are also rising. Sweden, Korea, and Canada are not too far behind us.
Why is this happening?
You may be wondering why this is happening. What has caused our household debt to increase so much? There are, of course, many factors. We touch on a few here:
- Population – Increasing population is no doubt a factor. More households = more debt.
- Interest Rates – Australia’s debt may be high, but our interest rates are low. So low, in fact, that they are currently at a level never seen before. At the time of writing this, they are at 1.5%. Australians are taking advantage of these extremely low rates but even with low interest rates, we are still paying above our income in interest payments alone. As the rate is so low,
- Self Managed Superannuation Fund (SMSF) borrowing – SMSF borrowing is increasing to enable people to buy into the property market amid surging house prices and using superannuation funds to do so. In recent years, there has been an explosion in SMSF borrowing. Borrowing via SMSFs has increased from $2.5 billion in 2012, to more than $24 billion in 2018 – That’s a huge increase!
How will this impact Australia?
Our record high level of household debt will impact Australia in many ways.
The answer from the IBS: “High household debt can make the economy more vulnerable to disruptions, potentially harming growth.” In addition to this, the global central banking authority has warned that Australia’s high level of household debt is putting future economic growth in jeopardy and risking the stability of the banking system.
Not only has all this debt made Australia’s national economy extremely vulnerable, it has blown the housing market up to the point that in Australia’s biggest cities, first home buyers can’t afford to buy a vast majority of properties.
This will impact all Australians, one way, or another.
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