Rising debt levels are something that many Australian households and businesses have had to contend with for over thirty years.Â
As of 2022, Australians remain in the unenviable position of having the highest percentage of net household debt compared to other countries with similar economies. According to available data from the OECD, the average Australian household debt-to-income ratio comes in at $187 for every $100 of after-tax income.Â
This is not a new phenomenon. Historical data suggests that the ratio of household spending to income has more than doubled since 1995.Â
There are many competing ideas as to why households in Australia are in this position. Debt is something that immediately causes stress and worries for many people. However, with a little research and perspective, the problem may be less severe than it appears on the surface.
Let’s get to the following commonly asked questions:
As of June 2022, Australian household debt was estimated to be at US$1.95 billion, which had remained largely stable since 2015, when the figure reportedly topped US$2 billion. Several forms of debt make up this figure.
According to the Australian Bureau of Statistics (ABS), mortgages come in at just over 56% of the total. A considerable rise in owner-occupier loans has driven this. The ABS has also estimated that Australian households contend with an average mortgage of $595,568.
Investor debt is the second biggest contributor, making up 36.5% of Australia's total personal debt. This debt is predominantly driven by shares, stock, and rental properties. The rise has been attributed, in no small part, to an increase of $7.5 billion in investor loans.
The remaining percentage is made up of a combination of personal debt, student debt, and credit card debt.
In December 2021, Australia recorded a national government net debt to gross domestic product (GDP) ratio of 36%. This GDP in Australia ratio refers to net government debt. It is calculated by subtracting the sum of interest-bearing liabilities from the total sum of financial assets, such as cash, deposits, and loans.Â
The latest Budget from the Australian government, however, projects that the Commonwealth government’s gross debt will be around $963 billion on 30 June 2022. This is even higher, at around 45.1% of GDP.Â
It’s also a dramatic increase from the 2020 debt to GDP figure of 24%. However, when taken as an international comparison with other G20 nations, the Australian government debt comes in as the third lowest percentage.
The forecast Government debt growth rate can be attributed to various factors, including economic support during COVID-19, increased commodity prices versus Government expenditure, and an increase in interest rates and the inflation rate, among other factors.
Several factors have contributed to household debt in Australia.
Firstly, there is increased competition between financial institutions, leading to lower lending rates and a higher level of available debt. Although the Reserve Bank of Australia has started increasing interest rates, previous lower interest rates made household debt accounts more manageable and, as a result, more appealing to borrowers. Unfortunately, as the rates increase now, people find it harder to budget, and gross debt is increasing.
The stigma around public debt has also shifted in recent years. Many recognise that good external debt (in the form of mortgages and business loans) can ultimately be a good thing for financial stability, so they are more willing to take this debt on.
Finally, lower house prices in recent years and more general price inflation have meant that most people have to take on higher debt levels to get onto the home ownership or investment property ladder.
The picture might not be as bleak as it seems regarding the national debt levels.
The Australian household income and wealth growth rate has also been substantial. Australia's average wealth per person is now six times larger than in 1990. This has meant that many Australians are far more able to handle debt than they previously were and have higher disposable income levels.
This is coupled with the fact that higher household expenditure and debt is concentrated primarily within higher-income households, which are more comfortable with managing the debt.
According to a study from Invezz, Australia's household debt is the fifth highest in the world, at about $86,000 per household. Given that the average available income is only $42,554, the amount of debt owed by households is a whopping 203%.
Although much of the debt Australians have built is good debt, there is still a sense of vulnerability in the household sector and risk to household finances.Â
Higher levels of debt will lead to higher interest and cash rates, putting strain on those families and households who have not had the time to get ahead on their mortgage payments or create budget surpluses through careful saving. An interest rate hike of just 2.5% could see debt interest payments double in certain situations.
This can also have a knock-on effect on the retirement prospects of many older people. Mortgages are taking much longer to pay off due to increased interest payments and a decrease in real income. According to ABC News, a 65-year-old woman is now three times more likely to be still working than in 2020.
As of the end of 2021, Victoria had the highest estimated debt levels, thought to be around the $87 billion mark. New South Wales follows in second with a forecast of around $53.2 billion, with Queensland rounding off the top three with a net debt of $25.5 billion.
While Government finances may not be doing their best, with increased net debt to GDP predicted for 2022, Australia is still in a good position compared to other developed countries worldwide.
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‍Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not consider your investment objectives, particular needs, or financial situation.