RISING HOUSEHOLD DEBT POISED TO HURT, WHILE HOUSE PRICES ARE BEING CITED AS BEING ‘DANGEROUSLY DUMB’
BY Chris Prasad
Australians have reportedly borrowed up a storm and are now racking up extreme levels of debt to buy homes in a landscape that already houses some of the world’s most expensive.
Market watchers are waving the red flag, warning that the situation is “a ticking time bomb” that could potentially wreck the economy if it is hit by a sudden shock.
In recent years, Australia has been one of the best-performing global economies among developed nations, but soaring property prices have also made it a leader in rising household debt. In a double-edged-sword situation, the positive economy has attracted plenty of property investment attention from around the world (particularly Asia), but the rush to buy has pushed prices up beyond a reasonable margin.
According to an AFP report, the nation has a household debt-to-GDP ratio of 123%. This is largely attributable to housing debt, making it only second only to Switzerland.
Global ratings agency Moody’s said that the current level exceeds that of the United States, Spain and Ireland at a point before their property markets crashed.
Meanwhile, the AFP article also quoted prominent Australian economist Chris Richardson as saying, “housing prices in this nation are now dangerously dumb”.
“Compared with the global financial crisis, our vulnerabilities are higher, our defences are weaker,” Richardson added.
Overall, the situation has put a giant spanner in Australia’s stellar economic experience, as the country is currently on course to hit a record-breaking 26 years without recession. It did particulalrly well during the 2008 global financial crisis, aided by its largest trading partner China’s insatiable hunger for commodities.
However, interest rates have been slashed to a record-low 1.50 percent to boost growth and counter Australia’s shift from mining-driven expansion. This fired up the housing market, which for a time was a good thing. Now, Australians say, it has become very scary.
Sydney’s median house price is AUD1.1 million (RM3.54 million). Across the country, prices have soared by an average of 250% in real terms since the mid-1990s.
This has not synegised with wage growth, which has been tepid in recent times. As such, people are being forced to spend a higher portion of their income on mortgages.
Reserve Bank of Australia has already warned that “stretched balance sheets make for more volatility when things turn down”.
It said that in many cases lenders are assuming that people can live more frugally than they can in practice, and that leaves little buffer if things go wrong.
Analysts say a financial crisis worsened by severe household debt would take on a different flavour in Australia.
In the US during the 2008 crisis, homeowners walked away from mortgages when situations turned sour, but Down Under home ownership is part of the “Great Australian dream” and locals will go to great lengths to avoid defaulting on loans.
“Australians will take their kids out of private school, they’ll sell their car, they’ll not go on holidays… they’ll do whatever they feasibly can to avoid defaulting on their mortgage,” independent economist Saul Eslake told AFP.
The risk is, if interest rates go up, people will pay more to service their loans and spend less on other things. This could slow the country’s economy considerably, even if it is not seen as a direct threat to the financial stability of individuals.
Only time will tell if Australia will continue to reach out to Asian and global property investors to continue to boost its economy, or revert to protectionism in order to preserve the Australian Dream for its citizens – at the cost of overall economic growth.
For now, Asian investors do not yet seem put-off by skyrocketing prices in key urban centres, nor newly introduced regulations to curb bulk buying. A significant rise in interest rates, however, could paint a different picture.