Australia’s personal debt dilemma

Australian banks have made their quarterly ‘confessional’ report, which shows that the level of personal debt hanging over Aussies’ heads is on the rise and doesn’t look like coming down any time soon.

ANZ has reported that home loans more than 90 days in arrears are at their highest level since 2010, and Westpac and many home loan providers also reported a rise in debt defaults.

Although Melbourne and Sydney residents are still exhibiting signs of struggle, it’s the mining towns that have been hit the hardest. Borrowers in South Australia, Western Australia and Queensland, who bought property during the boom, are now feeling the pinch of the mining slowdown.  

Australian households now have higher debt than citizens from any other country, this year overtaking the Swiss as the world’s most indebted, with outstanding debt equivalent to 125 per cent of GDP.

In his farewell speech last week, outgoing Reserve Bank of Australia Governor Glenn Stevens hinted at the problems this could cause.

“Gross public debt, if you add up all levels of government, is about 40 per cent of GDP,” said Mr Stevens. “We’re rightly concerned about the trajectory of that ratio in to the future, but gross household debt is three times that size, it’s 125 per cent of GDP.”

According to the RBA, most of the debt that Australians carry is for mortgages, loans and credit cards, which adds up to over $1 trillion. If we’re to look at that number on an individual basis, it would equal just over $73,000 for every Australian adult.


Opinion: Living beyond our means

While there is a difference between good debt (e.g. home loans) and bad debt (e.g. personal loans, credit card debt) it would seem that many Australians are living beyond their means.

There are concerns that our level of personal debt, and subsequent defaults, will be enough to bring down the banks and create a recession similar to that which was was recently experienced in the US.

Our level of private debt should ring alarm bells. Our gross household debt is currently hovering around 125 per cent of GDP, as Glenn Stevens states, or as high as 160 per cent of GDP, as was reported in The Australian in June. During the Great Depression, our public debt was higher than 170 per cent of GDP. It may be apples and oranges, but still cause for concern. 

Australians’ most common debt is in mortgages, which at least means there’s an asset to back it up. But if the housing bubble bursts, which many predict may happen soon, it will mean that many Australians have a mortgage that is higher than the value of the house it is funding. Many experts fear that banks won’t be able to handle such a house price crash.

In the meantime, low interest rates are providing some short-term relief and an opportunity to repay more on home loans, but once the cash rate increases so, too, may debt defaults.

Still, Glenn Stevens doesn’t seem to think it’s an insurmountable problem – so we can take some comfort in that – as long as we keep paying off our debts.

Maybe the Coalition has hit on something with its credo ‘time to live within our means’. If only our politicians would lead by example. It is worth remembering, though, that in this instance, the Government is not the bad guy. It is we who need to take control of our own finances, limit unnecessary borrowing and spending, and better manage our personal debt problem. That’s assuming, of course, those in debt actually have the means to live a modest existence and repay their loans. This is where banks may be wise to place higher scrutiny on lending, to prevent Australians borrowing too deeply and encourage them to live within their means.

Do you have high personal debt? How are you managing? Do you think this is a problem that can be helped with Government input? Or is it all on us to better manage our finances? Should banks place further scrutiny on lending?

Related articles:
Older Australians retiring in debt
Do your debts die with you?
Hardship register to help those in debt

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