Australian households have a well-deserved reputation for taking on large amounts of debt – and recent numbers show why.
According to the Bureau of Statistics, household debt has now increased to $1.8 trillion, or $79,000 for each person in the country.
After adjusting for inflation, this is higher than it’s been at any time in the last 25 years, despite the global financial crisis causing consumers to be much more cautious.
The ratio of debt to disposable assets has also started to climb again, and is at a three-year high of 148 per cent. Debt to total income is also higher than in a bunch of wealthy countries including the UK, US, Japan, Germany, Canada and France.
What is more, the ratio of debt to assets has been steadily climbing for the last 25 years, nearly doubling to just under 20 per cent at the end of 2013.
Scary stuff, right?
They are certainly big numbers, and Australia’s debt habit shouldn’t be ignored. Some of the more pessimistic investors see it as a serious weak spot in the economy.
But before being carried away, these figures need to be seen in context of whether we can afford the debt. And on this front, things are a bit less worrying then they may seem.
Perhaps most importantly, recent trends suggest Australian households are taking a more conservative approach to borrowed money.
For one, we are no longer increasing our borrowing at a quicker pace than our income as we did between 1993 and 2007 – something which was clearly unsustainable. In the last few years, debt has been growing at 2 per cent per person, which is slower than average pay.
Second, low interest rates make it easier to pay off the bank more quickly. The total amount of interest paid by households has fallen to 7 per cent of disposable income, down from the record high of 12 per cent around the global financial crisis.
Finally, economists reckon that debt would only become a serious concern for the country if people were unable to meet their repayment obligations. The most likely cause of this would be a big rise in unemployment – but that doesn’t look likely.
Indeed, the Reserve Bank last week even floated the prospect of unemployment starting to decline – though that’s far from certain.
All up, we should be alert to the rising debt load but it looks less concerning than it did a few years ago. Further gearing up would be a bad idea, but it seems many of us are getting the message.
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