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Australia’s In Front: Household Debt To Income
  • Australian household debt to income reached a historic level of 177% in April of this year. It is largely the result of Australia’s obsession with owning a home, easy access to debt and low interest rates. This is no small feat, but is nothing much to celebrate. The worrying thing is that the Australian experience stands in contrast with other comparable economies. In short, we are heading in the wrong direction.


Australian dream = big mortgage

  • Total household debt stood at $1.84 trillion at the end of 2013. This is the highest level in the last 25 years and is equivalent to $79,000 per person. As the graph below shows the increase has largely come from housing debt, especially since 2002, with other debt such as credit card or car loans only marginally increasing in the mid 2000’s. This debt in and of itself is not a problem. The problem arises when people are unable to repay. A fact the US is still coming to terms with.



No small feat, nothing much to celebrate

  • Over the last twenty years, household debt has increased more rapidly than household income. In 1990 household debt to income was 56%, by 2002 it had reached 125%. By April of this year it reached a zenith of 177%. This suggests substantial increases in the stock of debt and unsubstantial increases in income, since 2002 especially.



  • This is concerning for a number of reasons. Firstly, this is the highest-level of debt to income since 1987. Secondly, not even the US, leading up to the GFC, had a debt to income ratio this high. As the graph below shows, the UK came awfully close but has since experienced concerted declines, which leads into the third point. Since the GFC most comparable economies have experienced downward trends in their debt to income ratios.


Size of household debt compared to annual income



  • In contrast, Australia has been making its way skyward. As the graph below shows, Australia is not entirely alone in this trajectory, with Italy, France and Canada all heading in the same direction. Though no other comparable economy has such a high ratio. Put all together: Australians have taken on more debt, for more houses, but have less money to pay for it all.



Sitting casually on the precipice

  • A low interest rate environment has a lot to do with the growth in this debt. This makes sense intuitively. When money is offered cheap, people want more of it. The problem of course is that interest rates never stay cheap forever and having taken on more debt, households will feel this acutely.
  • The graph below shows interest payable on dwellings in Australia as a percentage of household disposable income from 1985-2014. There are two clearly discernible increases in the interest payable -between 1981-1989 and 2001-2009. Interestingly, different things caused these increases. The first were due to high interest rates and the second due to increasing amounts of debt coupled with lower interest rates. The story changed in 2011 with a decreasing percentage of disposable income needed to pay debt. This is a direct result of consistent declines in interest rates despite increasing levels of debt.



  • This leads us to now. As of June 2014, interest payable was 7.49% of disposable income. This does not seem significant except that it has been increasing since the January quarter despite interest rates being stable and at historic lows. This indicates either that income has declined or the amount of debt has increased. Going by the property market over the past year, its safe to assume the latter. The concern for Australians is that when interest rates increase, they will have more debt to service with less capacity to repay it.



  • Australian households have reached extremely high levels of debt to income; higher than any comparable economy in the world. This is a cause for concern on a number of levels but mostly because interest rates are at historic lows, which means there is probably only one way to go and it is not going to end pretty.


This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.

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