Is household debt a worry for Australia?

Since the GFC, excessive debt has been a source of volatility and constraint for various countries, notably the US and Europe.

Initially the focus was on the private sector, more recently the public sector. Australia has relatively low public debt but how does it stack up in terms of total debt? This is particularly relevant in assessing the vulnerability of Australia should something go wrong, e.g. if China collapses and our trends of trade plummeted.

Total debt outstanding

The next table shows total debt outstanding, i.e. public and private, as a percentage of GDP. Quite clearly Australia ranks a fair way down the list. As is well known, Australia’s level of public debt is very low. Where Australia is a bit more vulnerable is in terms of private debt and this is largely due to a relatively high level of household debt.

Source: OECD, ABS, RBA, AMP Capital

Household debt in Australia rose strongly over the 20 years prior to the GFC as interest rates trended down, financial competition led to increased access to debt and relatively stable economic conditions and rising asset prices encouraged households to gear up.

Debt outstanding, % of GDP

Source: IMF, Haver Analytics, Ned Davis Research, AMP Capital

The GFC has brought a more cautious attitude to debt on the part of Australians thanks to weaker asset prices, worries that house prices might go the same way as those in the US and parts of Europe and increased job insecurity, and this has been accentuated by a tightening in lending standards.

Nevertheless debt levels have basically stabilised relative to income in contrast to other countries where they have fallen, although this in large part reflects defaults in the US (see the previous chart). What’s more with soft share markets and house prices and rising incomes in recent years, Australian household balance sheets as measured by net wealth (assets less liabilities) relative to income have deteriorated.

Source: OECD, RBA, AMP Capital

Similarly, soft asset prices at a time of stable debt levels have seen gearing, as measured by debt to assets, rise.

Source: OECD, RBA, AMP Capital

Against this several things are worth noting. First, reflecting household caution the household saving rate is now very high in Australia at around 10% compared to just 3-4% in the US. This has been mainly flowing into bank deposits.

Source: OECD, AMP Capital

Finally, the riskiness of Australian housing loans has been falling. Non-performing loans remain low. Low doc loans are only around 5% of outstanding housing loans and less than 2% of new approvals. And around 50% of home borrowers are ahead on repayments. And all mortgages are full recourse, meaning Australian’s cannot simply walk away from their homes if they have negative equity. And, there is plenty of scope for the RBA to cut interest rates further.

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