September 13, 2017 0

Australia’s Household Debt Crisis Looms

Posted by:Charles Bosse onSeptember 13, 2017

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

This bubble is simple to spell out. Confidence! It’s the misconstrued perception that Australia’s last twenty years of continual economic growth will never experience any kind of correction is most disturbing. 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. Unfortunately, the decision makers and powerful elite in this country are from these two cities, and see Australia’s economic hurdles through a completely different lens to the remainder of the country. It’s a two-speed economy spiralling uncontrollably.

I acknowledge that this impending crisis isn’t just as straightforward as house prices in our two biggest cities, but the median house prices in these cities are ever rising and contribute significantly to overall household debt. The specialists in Canberra understand that there’s an inflamed house market but appear to be reviled to take on any stern steps 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 priorities. For Western Australia and Queensland specifically, the mining bust has sent real estate prices sinking downwards for years now.

One of the signs that demonstrate the household debt crisis we are beginning to see is the rise in the bankruptcy numbers over 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 experts are examining the damaging effects of house prices going backwards. Although not the predominant cause of personal bankruptcies, it certainly is a significant factor.

House prices going backwards is just part of the problem; the other thing is owning a home in Australia allows lenders to put you in a very different space as far as borrowing capacity. Simply put, 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 extent of debt differs 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 wind up bankrupt, so consequently 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 because 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 get in touch with us here at Fresh Start Solutions on 1300 818 575 or visit our website for additional information: http://freshstartsolutions.com.au

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