Australia’s Household Debt Crisis

Australia’s Household Debt Crisis

Without considering tomorrow, Australians are shouldering alarming levels of debt.

Australians are in debt—crippling household debt. In 2016, household debt reached a whopping aus$2 trillion or an average of $250,000 (us$190,000) per household. The country’s gross domestic product in 2016 was just $1.62 trillion. Australia wins the shameful “second-highest debt-to-gdp ratio in the world” award.

It also stands on the podium for its debt-to-income ratio with a record 190 percent, the highest among developed nations. The ratio is driven up by property prices—as buyers obtain larger mortgages for increasingly expensive properties.

This is not healthy; it is downright deadly. For perspective, at the peak of the 2008 housing bubble, America’s ratio was a measly 130 percent. Look what happened.

Australia is addicted to debt. The staggering weight is borne primarily by investors and owner-occupiers, but their knees are starting to buckle.

Mortgage and Investor Debt

The Australian Bureau of Statistics says that the largest slice of Australia’s household debt pie goes to owner-occupied mortgages—people buying and living in homes. These mortgages constitute 56.3 percent of the nation’s household debt.

But don’t worry, mortgages fall under what is classified “good debt.” It is borrowing so you can purchase an asset—a home. For owner-occupiers and investors, this asset will hopefully appreciate in value and possibly be sold on in the future.

As such, there is an inherent risk involved—prices might fall instead of rise. Right now, that risk in Australia is stratospheric, and it is being wholeheartedly ignored.

Australia is going barmy for investment homes. People of all ages, worried that pensions and retirement funds will not suffice—or exist—upon retirement, are buying up houses and apartments. Investor debt—much of which is in these properties—makes up 36.5 percent of the nation’s household debt.

People are buying houses left, right and center, hoping to one day sell the house for a wheelbarrow full of cold, hard cash. But there is a problem: High house prices are not deterring investors—they just borrow more money. Prices are remaining inflated and everyone is assuming that they will keep going up!

Too few stop to consider what could happen if house prices come tumbling down.

Right now, there are thousands of unoccupied homes and apartments across Australia that have been bought as investments. Each consecutive house in an investor’s portfolio is used as collateral for the next. Every investor expects the value of that house to increase, meaning they can pay back the loan at a later date. Often banks will give interest-only loans whereby the recipient never pays off the principal. It’s a gamble that too many Australians are hooked on.

Again, everyone assumes that prices are going to just keep on rising. But the still-smoking rubble of America’s 2008 housing collapse speaks to the contrary.

The Bubble

The government and the real estate agents will deny it, but Australia is in a housing bubble. The average home in Sydney is over a million dollars. Glamorized dog kennels sell for hundreds of thousands of dollars in the big cities. Last year, the Economist estimated house prices were 40 percent overvalued.

Timo Henckel of the Australian National University believes that Australia is in a bubble. In an article for Domain, he wrote, “All it takes is a modest change in investor sentiment, a few interest rate hikes, or a noticeable increase in unemployment, and the whole scheme unravels. I hope I’m wrong, but history is on my side.”

When this bubble pops, house values will nose-dive. And it is never a soft landing. Prices vary, but debt doesn’t change. People won’t want to get stuck paying off a loan for a worthless house. So when prices start to fall, people will sell—or try to at least. Better to get out while there is time. But when everyone is trying to sell, it results in a glut of houses on the market, driving the value down even further. That can mean big losses overnight—family wealth wiped out. In a piece for Bloomberg View,Danielle Di Martino Booth wrote, “Household debt has been growing at multiples of income, a disconnect that can only exist in a wonderland of permanently low interest rates.”

Right now, Australia is still dreaming.

One Percent From Disaster

David Taylor from abc News wrote, “Having too much debt is a bit like flying an old Boeing 747 plane with just one engine. You’ll be OK, for a while, but lose that second engine, and you’re moments away from a free fall.” Interest rates are just one of a host of problems that could shut down engine two. Right now, the official rate is 1.5 percent—a historic low. This encourages more people to go out and take a loan on a house. If the Reserve Bank raises the rates and spooks investors, watch out. The bubble will pop; the engine will stop.

In an interview with Four Corners, one real estate agent said he was inundated with buyers stretched to the limit. “The kids come in and whatever they can borrow they generally do, which is pretty scary.” When asked the dangers of a rate rise, he replied, “If interest rates go up, they don’t make those allowances. … I’d say 1 percent would hurt a lot of people.”

On May 29, Australian Treasury Secretary John Fraser warned, “Sometime between now and Armageddon, interest rates will go up.” When the rise comes, Australia’s financial Armageddon won’t be far behind.

Bad Debt

Remember, the sword of Damocles now dangling over homeowners and investors is considered “good debt.” We haven’t even spoken about bad debt yet. Once the mortgage payments, fees and taxes are paid, what are Australians doing with the rest?

Australians are racking up dangerous levels of personal, student loan and credit card debt—“bad” debt. While only constituting small percentages of the household debt, these categories are still dangerous.

If I buy a sandwich and put it on a credit card, there is no financial gain. I don’t sell on the sandwich; I eat it. And if I don’t pay off the loan there is no collateral for the lender to take in order to recoup losses.

Australia’s national credit card debt is over $32.5 billion. Australia is spending $5 billion in interest per year. A 2015 survey found that 53 percent of Australian adults were in debt, with 1.7 million expecting to take that debt to the grave.

Among the Walking Dead

Remember the 2008 financial crisis? At the time, the likes of Australia and Canada died financially—we just haven’t realized it yet. We had been bingeing on dodgy debt for years right along with the rest of the world. We were only saved in 2008 by China’s demand for our iron ore. That crutch fell in 2014. To stop the hemorrhaging, the Reserve Bank cut interest rates to the current level of 1.5 percent.

In a book published last month titled Can We Avoid Another Financial Crisis?, Prof. Steve Keen argues Australia, along with the likes of Canada, is a “zombie” economy that is set to topple in the next few years. Maneuvers and initiatives by our government in 2008 only postponed the inevitable. “Both [Australia and Canada] will suffer a serious economic slowdown in the next few years since the only way they can sustain their current growth rates is for debt to continue growing faster than gdp.”

A Better Way

It is only natural to want your own home to maintain and land to cultivate. Proverbs 24:27 states, “Prepare thy work without, and make it fit for thyself in the field; and afterwards build thine house.”

Just as God recorded that it is right to own your own home, so too did He give the principles to live by and means by which we might enjoy these things. But such a path requires sacrifice and change—not just in the way we handle finances, but in the way we handle life itself!

We offer a variety of free books and booklets on the subject, including Solve Your Money Troubles!

Creditors and banks will offer a different way. Easy and reckless credit is the norm, and many enjoy the “freedom” of living beyond their means—while it lasts. But living beyond our means it is not the way God intended man to get ahead. Few consider the fact that they are totally enslaving themselves. Who remembers the old Proverb “the borrower is servant to the lender”? (Proverbs 22:7).

Australia is addicted and enslaved to debt. Now is the time both nationally and individually to look to God’s approach to finances. He can and will bless you for it.