Rising Household Debt in Australia Is Taking its Toll

Rising Household Debt in Australia Is Taking its Toll

Today the average Australian household owes $250,000. During the property boom (now bubble), this figure is gradually increasing thanks to lower interest rates, rising property prices, increased access to housing finance among other factors. As things unwound with credit suddenly reaching it’s limits, interest rates going up and mortgages being more scarce, many hardworking citizens now face a starkly different reality.

Roland Bleyer, the visionary Australian behind Debtco explained the current situation as follows: “You have good, hardworking people in Australia who played by the rules for years and who trusted the system. They simply lived the Australian dream, got on the property ladder and had some debt which always used to be offset by rising equity in their homes. Today they feel the system failed them. They were not quite prepared for a personal or small business debt default. This is exactly why we started Debtco: We help them get the best possible outcome through debt negotiation and reliable methods, ultimately to prevent them from being subject to legal action and to regain faith in the system”.

How the debt story goes:

Conventional wisdom holds that debt can be advantageous in some instances. For example, it allows purchases which are not possible on income alone. Debt also assists in the accumulation of wealth, which is a vital economic resource that supports consumption during times of reduced income.

However, at high levels, debt can lead to several vulnerabilities, particularly during events, such as loss of a job, a drop in asset prices, and increased interest rates. Below we’ll help you understand the rising household debt in Australia, and how it is affecting over-indebted households. Read on…

Factors Contributing to the Rising Household Debt

Since the 2008 global financial crisis, other developed countries have witnessed a decline in household debt. But the case in Australia is different. In fact, it’s reported that Australia’s household debt has increased by 70 percent to around 190 percent from the early 1990s to 2018.

So what factors fueled this increase?

1. Strong Growth in Housing Prices

Although housing prices offer different trends across the country, the bottom line is that they have been rising since 2003. Capital cities, particularly Perth, have recorded the highest increase in prices due to the resource boom.

In fact, in August 2019, the housing prices across the country increased by 0.8 percent, which was the highest in two years.

Increased housing prices mean buyers have to borrow more to meet the purchasing costs. With more ability to borrow, people easily bid up on houses.

2. Lower Interest Rates (Now higher!)

Every year, the Reserve Bank of Australia (RBA) lowers interest rates to cut the cost of mortgages for Australians. The ultimate goal of such efforts is to protect the continuously struggling Australian economy. It helps to reduce pressure on the currency, particularly when other nations have cut their rates.

Home loans in Australia have an interest rate of 3.00% p.a. and 4.00% p.a., as of September 2019. But homebuyers can get offers as low as 2.7 percent. This is expected to drop as the RBA continuously makes rate cuts.

With such low interest rates, buyers were pretty much willing to borrow more to fund their purchases. Consequently, increasing their household debt. Now that rates are increasing, people simply cannot keep up!

3. Easy Access to Housing Finance

In the mid-1990s, specialist mortgage brokers entered the Australian home loan market. To win clients and grow their market share, they undercut the mortgage rates offered by existing lenders and introduced new products, such as interest-only loans and home equity loans.

Additionally, these brokers made their products attractive to potential borrowers by requiring less paperwork.

Ever since, the availability of housing finance in Australia has increased owing to several factors, including technology. Some blame loan comparison websites like Mate Canstar, RateCity and Mozo because they offer access to personal loans and over 4,000 plus home loans, which people can access anytime and anywhere. But in reality, comparison engines simply helped people to get a better deal – it is not what caused the bubble in assets to pop, as economists will point out.

Is Household Debt what caused a crisis?

In December 2018, the household debt hit a record high of $2.44 trillion. Different studies have revealed that Australia’s debt to income ratio is high compared to other countries. Many experts and financial institutions, including the RBA, have warned about the rising debt.

For example, households with big loans risk defaulting on the loans or cutting back spending should they lose their source of income. During an economic downturn, such households are more likely to reduce their spending by more than other households, and this can hurt Australia’s economy.

High levels of debt will also push households into negative equity. This basically means homeowners owe more on their mortgage than the value of their homes. As such, selling their homes to pay the mortgage won’t get them out of the debt.

As of April 2019, just over 2 percent of borrowers are in negative equity. If the prices of property fall, this number is likely to grow. This will affect the economic landscape of areas with housing price drops as fewer people will be willing to sell their homes. Negative equity also means banks will face losses if borrowers are unable to repay their loans.

There Is Still Hope

Even though the Australian household debt figure looks troubling, there are several factors that instill hope and positivity. For example, higher-income and wealthier households hold the most debt, and they’re pretty able to service their debt.

Also, the average net worth of Australians has increased by 28 percent between 2003 and 2016. This is attributed to the increasing value of assets over the years. Sadly, the increasing value of assets is uneven, with higher-income households reaping more than poor households.

More households are servicing their debt as housing interest payments take up 7.6 percent of the disposable household income. Also, few households are behind on their mortgage payments. Recent studies have shown that around 0.7 percent are more than 90 days behind.

Managing Your Household Debt

National debt stats and figures can be quite mind-blowing, but they don’t reflect your individual case. On an individual level, some households have fewer debt issues than others. The bottom line is that there is always a way to manage your debt issues; you just have to find yours.

Start by creating a budget to determine your expenses and sources of income. This way, it will be easier for you to identify expenses you can cut back or eliminate to save more for your debt payments. It’s also wise to have a savings account to reduce your need for loans.

If you have credit cards and personal loans, consolidating them into one account allows you to deal with one interest rate. It also makes the repayment process convenient for you.

Final Thoughts

At this point, the rising housing debt in Australia is a problem, and it can amplify the economic downturn if it’s not controlled. It’s among the world’s highest but the majority of it is from investments and mortgages.

You’d think that if you have debt, making the first step towards repaying it is what matters. Most people also think to develop a repayment plan and manage your finances wisely, and that they’ll be being debt-free. Well, some have learned a little secret: that debt renegotiation can even get some debts written off completely – so do speak to debt specialists before drawing any conclusions.