RBA Report Shows Australians Taking On Record Household Debt
Reserve Bank governor Rick Battelino showed just how dependent Aussies have become on debt in his presentation of a report from the Reserve Bank, entitled the Financial Stability Review. After closer examination of actual contents of the report, we think Financial Instability Review is a more accurate description.
Aussies have taken on record debt at a time of record low interest rates. Rising asset values have encouraged it. But what happens when interest rates rise? If asset values fall at the same time that the cost of servicing debt goes up, the gamble doesn’t pay off at all. It costs you dearly.
In his remarks, Battelino said that “deregulation, innovation and lower inflation have simultaneously increased the supply, and reduced the cost, of finance to households, and not surprisingly households have responded by increasing their use of it. Household credit outstanding has risen from 20 per cent of GDP in the 1970s to 30 per cent by 1990, and to around 100 per cent today. Household credit accounted for the bulk – 85 per cent – of the rise in overall credit to GDP over the past 15 years, and household credit now greatly exceeds business credit in terms of outstanding.”
Here’s what he said in a picture:
It is true that an increase in financial assets corresponds with the rise in household credit. People are borrowing record amounts to pay record amounts for expensive homes. It all smacks of a credit-driven inflationary boom. When house prices fall—as they are now in America—the debt remains.
To his…er…credit, Battelino notes a dangerous trend in the growth of household credit. “The household sector,” he says, “is running a highly mismatched balance sheet, with assets consisting mainly of property and equities, and liabilities comprised by debt. This balance sheet structure is very effective in generating wealth during good economic times, but households need to recognise that it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise.”
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by kayle on 26 September 2007:
"Aussies have taken on record debt at a time of record low interest rates."
That's the problem, isn't it.
Low interest rates plus stagnant wages led to consumers taking on more debt to finance their lifestyles; which in turn led to false demand; which in turn led to overpricing of assets; which in turn led to toxic debt (e.g., "easy credit" with unsustainable repayment plans).
Next steps: oversupply of overpriced assets, which in turn will lead to appreciation-dependent credit blowing up, which in turn will lead to reduced consumer demand, which in turn will lead to reduced profits, which in turn will lead to lender margin calls, which in turn will lead to a solvency crisis.
(It isn't so much credit as solvency that's the problem.)
I say "will" but this downturn is already beginning here.