Australia’s Household Debt Crisis Looms

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Australia’s Household Debt Crisis Looms

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Today in the news, former economics advisor John Adams proposed that Australia is too late to stop an ‘economic apocalypse’ regardless of his repeated warnings to the political elites in Canberra. He continued to urge the Reserve Bank to raise interest rates to stop household debt getting further out of hand.

This bubble is easy to explain. Confidence! It’s the fallacious perception that Australia’s last twenty years of continued economic growth will never encounter any type of correction is most distressing. Australia survived the GFC and a mining boom and bust. In the meantime, Melbourne and Sydney house prices have not missed a beat or taken a backward step. Sadly, the decision makers and powerful elite in Australia are from these two cities, and see Australia’s economic hurdles through a totally different lens to the rest of the country. It’s a two-speed economy spiralling out of control.

I acknowledge that this looming crisis isn’t just as simple as house prices in our two biggest cities, but the average house prices in these cities are ever rising and contribute significantly to overall household debt. The authorities in Canberra realise there’s an overpriced house market but appear to be reviled to take on any genuine actions to correct it for fear of a property crash.

As far as the rest of the country goes, they have a totally different set of economic prerogatives. For Western Australia and Queensland specifically, the mining bust has sent house prices tumbling downwards for years now.

Among one of the warning signs that demonstrate the household debt crisis we are beginning to see is the increase in the bankruptcy numbers across the entire country, particularly in the 2017 March quarter.

(source: https://www.afsa.gov.au/about-us/newsroom/media-release-regional-personal-insolvency-statistics-march-quarter-2017).

In the insolvency sector, our firm are noticing the damaging effects of house prices going backwards. While it is not the leading cause of personal bankruptcies, it definitely is a decisive factor.

House prices going backwards is just part of the issue; the other thing is owning a home in Australia enables lenders to put you in a very different space as far as borrowing capacity. Simply put, you can borrow far more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the level of debt varies considerably from the non-home owner to the home owner. Lending is hinged on algorithms and risk, so I suppose if you own a home you’re more likely to have consistent income and less likely to end up bankrupt, so subsequently you can borrow more. If you own a home in Sydney and Melbourne, you’re a safer risk than if you own a home in Mackay, simply due to the fact that in one area the median house prices are booming and the other is going backwards, as it’s been doing so for years.

In conclusion, it seems we are running into a wall at full speed, and there are very few people suggesting we slow down. If you would like to know more about the looming household debt crisis then phone us here at Bankruptcy Experts Tamworth on 1300 795 575 or visit our website for more information: www.bankruptcyexpertstamworth.com.au

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