Australia’s household debt at an all-time high

RBA dilemma: raising interest rates may help the economy but cripple many households.

middle aged couple dealing with debt

Australia’s household debt levels are so high that many will be left vulnerable should we see a rise in global interest rates or any other economic downturn.

Australian households are among the world’s most indebted after a $1 trillion splurge on mortgages over the past 10 years.

The Bank of International Settlements (BIS) warned that should global interest rates rise, many Australian households would find themselves in a terrible financial position.

According to the Reserve Bank of Australia (RBA), Australia’ household debt-to-income ratio is at an all-time high of 189 per cent. This figure has risen sharply in recent years after sitting at around 160 per cent for much of the 2000s and 60 per cent in the early 90s.

It is estimated that, of the country’s 3.1 million households, around 670,000 can’t afford to cover their living and interest rate costs, even though borrowing costs are at historically low levels.

The BIS report underlines the risk many households face by accumulated high debt levels during a period of low interest rates.

"Maturing financial cycles and high debt levels raise the risk of potential weakness in consumption and, in some cases, investment," said BIS head of monetary economics Dr Claudio Borio.

"In many economies, the expansion has been consumption-led. The empirical evidence indicates that such expansions are less sustainable. Our analysis suggests that a number of economies where household debt is historically high can be vulnerable, especially should interest rates rise considerably."

The report showed that household debt in Australia, Canada, Sweden and Switzerland, rose by two to three percentage points in 2016.

When interest rates rise – and they will eventually rise – household spending will be reduced considerably, which could weaken GDP growth.

Low interest rates may have helped to fuel a housing boom, but increasing these same rates, although good for anyone living off the interest from savings, will be a disadvantage to the consumer sector, putting the RBA in a tough spot.

Stagnant wage growth and the risk of slowing down consumer spending, which accounts for around 60 per cent of our economy, makes it very difficult for the RBA to increase the official cash rate.

This is bad news for retirees who have been receiving less income from savings and investments as a result of the lower official cash rate. Many retirees are already feeling the pinch of living off a limited income, possibly making it more likely for them to take risks with their investments.

So, while the low cash rate is currently working for the economy, increasing it in the future will certainly have some benefits for retirees. And if the increasing ageing population can start spending again, it may offset some of the reduced spending of other generations

Is the low cash rate a blessing or a burden on you?



    To make a comment, please register or login
    27th Jun 2017
    Current interest rates are obviously not good for retirees who rely on the return from their investments, if the government reduced the deeming rate to that which we actually get would make a significant difference, but the negative from that is that some pensioners will get an increase in their pension, I would like to have a bit more, but do I need it at the expense of others, bit of a dilemma I guess, each person's situation is different.
    Kane Jiang Retirement Planner
    27th Jun 2017
    Hi Dim, for retirees, the secret is to work out your risk profile, and find the right "balance" in your portfolio. Most often you don't need to take incredibly huge risk to get an acceptable return.
    27th Jun 2017
    You have high house prices because of the Carbon Tax...............

    It's not rocket science. We have high household debt because interest rates were dropped to very low levels and people piled into what investment they could to make up the difference. Specifically houses and high dividend paying stocks. So now we have high household debt and young people who cannot afford a house because these have become too expensive whilst wages for average Australians have been held down.
    27th Jun 2017
    Totally agree, Mick. As soon as the rates started to fall so R.E. agents jumped up in their seats, and pushed the prices up. Why the RBA have a decision every Tuesday I just don't know, they never used to do this. It was only when rates were in double figures that house purchase was not just a dream for young people. Remember when we were paying 14.25% ?
    27th Jun 2017
    Just part of the cycle ,the transfer of wealth from the slaves to their masters. It happens every few years and most people believe our politicians are actually voted in to look after the majority and not just themselves and their rich mates .
    Two suggestions.
    1. Make it a criminal offence to donate to a political party.
    2. Throw the lot of them out and appoint the government by random ballot drawn from the electoral roll.
    29th Jun 2017
    Yippee...a fellow thinker
    27th Jun 2017
    When I took out a mortgage I factored in the possibility of rates rising by 5-7% and my salary staying the same. If I could not afford the mortgage at the higher rate then I kept looking.If I could afford the mortgage at the higher rate then fine I went ahead. AND kept paying at the higher rate. Result? Mortgage paid down quickly and due to expire in about 21/2 years from now.

    If you have a credit card and can't afford to pay it off in full every month, then you simply can't afford the credit card.

    Of course it means sacrifice, no eating out regularly, no buying lunch at work, no holidays, new clothes only when necessary, no household items unless essential, cook at home no takeaways etc etc. But it is all a question of priorities.

    It is all quite simple really. Live within your means. And stop blaming others for your poor financial management decisions.
    Oldman Roo
    27th Jun 2017
    Constantly lowering interest rates are more of an indication of Government failure to effectively manage the economy . It is also a contributing factor to only creating wealth for a a few and the overall picture is doom and gloom for others .
    The bulk of the money goes into houses and associated industries and the others miss out or join the rat race of buying houses that are highly overpriced and , unless you are a wealthy foreign investor , the bit of liquidity you have left does not help the economy - so the geniuses in Canberra cause further interest rate cuts and make the situation go from bad to worse . Of course this all makes sense to Politicians as many of them are property investors and low interest rates , negative gearing and foreign buyers running up house prices are all great money spinners for them and the wealthy .
    29th Jun 2017
    And the idiot Pollies, pensions/perks paid for by us (even pensioners who 'til the GST came in had never & were promised by R.Menzies that never would) now pay tax....keep telling us to spend more. We would if it was "fair play"
    Kane Jiang Retirement Planner
    27th Jun 2017
    Unfortunately our economy is not strong enough to sustain higher cash rate. Half of Australians would be in mortgage stress with 2% increase apparently - see link below:
    Oldman Roo
    27th Jun 2017
    Kane Jiang , We used to have a strong economy and and with Canberra always taking the wrong direction , we have ended up where we are . Interest rate cuts becoming the way to go and certainly profitable for the wealthy until we reach rock bottom with no more interest to cut . At that point there will be a complete break down of any health in the economy , the incentive to save and provide for old age will be history and the average citizen will line up for welfare . Exactly what they tell us at the moment this country can not afford .
    But who cares , by that time present day Politicians will be retired with plenty of income made while the country and ordinary man was " taken for a ride ".
    27th Jun 2017
    Very true. I borrowed at 14% with a guarantee of not going past 16% and the loan hit 23% last high cycle. Yes I had to sell property and cop a capital loss. Those are the breaks. Most of us have dealt with mortgage stress a time or two.

    The RBA will have a bit of trouble holding rates down if the overseas bond markets decide otherwise. Quantitative tightening is beginning to rear its head. Investors won't continue to keep selling money for nothing.

    I certainly agree that our economy is not very strong at all right now and there is no quick fix.
    29th Jun 2017
    There is a "quick fix" Rae.....raise interest + pay rates by just 1% (covered for mortgagees, not the o/s Investors) which will:-
    - deter some o/s Investors altho suspect not as our rates will still be @ almost record lows
    - increase spending by approx 25%+ of population, ie: pensioners
    - keep house prices from increasing so rapidly.
    My dear old Dad told me many decades ago to invest in "bricks & mortar only" as home prices double every 10yrs as they did, but considerably more in past few yrs. That's a good investment, much better than majority of shares in past few decades. Reckon we'd all be happy with that.

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