By Andrew Willink
12 August 2008
As the intensive weight training kicks in, fed by high employment figures, Australia’s economy is in better shape than ever to defeat arch rivals, America and the UK in the race for gold at the Debt Olympics.
Over the last 10 years households in Australia have borrowed an additional $770bn. Of this, 90% was used to buy assets. $420bn for houses to live in, $240bn for houses to rent and $40bn for shares. If borrowing was an Olympic sport, we would have to be a big chance for gold at the Debt Olympics.
In the glamour event, the Debt Olympics marathon, the Australian economy is gaining ground, thanks to a great start off the blocks. Our level of debt is still increasing and running on very strongly. Unfortunately for them, the USA dropped out of the race with a severe case of mortgage stress fracture. Team America blames their running shoes for being sub prime and causing this major default in the marathon.
The Debt Relay has seen business pass the baton to households which are now shouldering the lion’s share of monies owing. The ratio of personal debt to income in Australia is one of the highest in the world - higher even than America and the UK. For every $100 we earn, we owe $130. Credit and charge cards account for $26 billion of the debt.
Households have become more financially astute and have learnt how to utilise their most important asset, cashflow as well as mange the tax system, by using negative gearing.
Where has the debt gone?
While some are saying we are living beyond our means and the "we want it now" generation suggests that debt has gone into consumer spending like plasma TV’s, cars, holidays etc - this isn’t the case, says Deputy Reserve Bank Governor, Ric Battellino. A wider range of debt options such as home equity borrowing, credit cards, personal loans, margin loans has allowed households easier access to debt. Additionally competition from non-bank lenders has opened up the market even further.
This is in stark contrast to the 1960s when the level of household debt was very conservative at 5%. It may be difficult to imagine now but in years gone by people actually owned 95% of their household assets outright. Admittedly, a large number of households have NO debt but the ability to borrow is higher at present.
The borrowing isn’t spread evenly across the population with most of the debt accumulated by those who can afford it. In other words it’s not young couples with the large level of borrowings - it’s middle aged and higher income households. These households are trading to better quality housing, buying investment properties or buying shares. They have identified that using cashflow to buy assets is better than paying tax.
More than 80% of the households in the top half of the income distribution have debt, as opposed 30% in lowest decile. Thus it would be a mistake to conclude that a rising ratio of debt to income is necessarily a sign of financial stress among households.
Despite the rise in the level of debt, the debt servicing level for those in the top half of income distribution (who are taking on most of the debt) is less than 20% of gross income. This has only marginally increased over the last decade and it’s lower than the bottom half of the income distribution which average 30% of gross income in debt payments.
Commentators at the Debt Olympics have forecast that rising household debt is likely to continue as higher income groups still have room to fund more debt. The factors that assisted with the credit growth, being strong economic conditions and deregulated financial system are still in place.
Much recent debt has been created by people borrowing to invest. Normally, in Australia, people borrowing to invest account for 25% to 30% of debt. However, encouraged by the lower interest rates and increasing property prices of the last property boom, borrowings to purchase residential property rose dramatically.
It’s looking like Australia is well and truly on its way to smashing world records to grab the gold for team debt at the Debt Olympics. What remains to be seen is which countries stand either side at the gold medal presentation.