September 13, 20170

Australia’s Household Debt Crisis Looms

Posted by:Charles Bosse onSeptember 13, 2017

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

This bubble is very easy to understand. Confidence! It’s the misconstrued perception that Australia’s last 20 years of continued economic growth will never experience any sort of correction is most unsettling. Australia survived the GFC and a mining boom and bust. Meanwhile, Sydney and Melbourne house prices have not missed a beat or taken a backward step. Regrettably, the decision makers and powerful elite in Australia live in these two cities, and see Australia’s economic hurdles through a totally different lens to the remainder of the country. It’s a two-speed economy spiralling uncontrollably.

I concede that this impending crisis isn’t just as simple as house prices in our two largest cities, however the median house prices in these cities are ever rising and contribute considerably to total household debt. The boffins in Canberra understand that there’s an enflamed house market but seem to be despised to take on any substantial measures to correct it for fear of a property crash.

As far as the remainder of the country goes, they have an entirely different set of economic considerations. For Western Australia and Queensland specifically, the mining bust has sent real estate prices sinking downwards for years now.

One of the signals that confirm the household debt crisis we are starting to see is the rise in the bankruptcy numbers throughout the entire country, especially in the March 2017 quarter.

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

In the insolvency sector, we are seeing the disastrous effects of house prices going backwards. Even though it is not the prime cause of personal bankruptcies, it clearly is an integral factor.

House prices going backwards is just part of the issue; the other thing is owning a home in Australia allows lenders to put you in a very different space as far as borrowing capacity. Put simply, you can borrow much more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the amount of debt differs significantly from the non-home owner to the home owner. Lending is based upon algorithms and risk, so I suppose if you own a home you’re more likely to have stable income and less likely to wind up bankrupt, so in turn 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 appears we are running into a wall at full speed, and there are few people suggesting we slow down. If you wish to know more about the looming household debt crisis then give us a ring here at Fresh Start Solutions Darwin on 1300 818 575 or visit our website for more information: http://freshstartsolutions.com.au/bankruptcy-darwin

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