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 stop an ‘economic apocalypse’ even after his repetitive warnings to the political elites in Canberra. He continued to advise the Reserve Bank to raise interest rates to prevent household debt getting further out of hand.

This bubble is very simple to describe. Confidence! It’s the mistaken perception that Australia’s last twenty years of sustained economic growth will never encounter any kind of correction is most worrying. Australia survived the GFC and a mining boom and bust. In the meantime, Sydney and Melbourne house prices have not skipped a beat or taken a backward step. Regrettably, the decision makers and powerful elite in this country reside in these two cities, and see Australia’s economic challenges through a totally different lens to the rest of the country. It’s a two-speed economy spiralling out of control.

I concede that this emerging crisis isn’t just as simple as house prices in our two biggest cities, however the median house prices in these cities are ever rising and contribute considerably to overall household debt. The specialists in Canberra are aware of an inflamed house market but appear to be loathed to take on any genuine measures to correct it for fear of a house crash.

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

One of the signals that confirm the household debt crisis we are beginning to see is the increase in the bankruptcy numbers throughout 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 market, our team are noticing the harmful effects of house prices going backwards. Though it is not the predominant cause of personal bankruptcies, it certainly is a crucial factor.

House prices going backwards is just part of the predicament; the other thing is owning a home in Australia allows lenders to put you in a very different space as far as borrowing capacity. To put it simply, you can borrow a lot more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the quantity of debt varies dramatically 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 end up bankrupt, so in turn you can borrow more. If you own a home in Melbourne or Sydney, 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 very few people suggesting we slow down. If you would like to know more about the looming household debt crisis then call us here at Fresh Start Solutions Perth on 1300 818 575 or visit our website for more information: http://freshstartsolutions.com.au/bankruptcy-perth

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