This week the Australian Bureau of Statistics released some pretty sobering data on household debt and over-indebtedness. It is most significant because it clearly emphasizes just how dangerous it would be for the Reserve Bank to raise interest rates, especially as this would also work to hold our dollar up to the detriment of our export industries.
The data relates to 2015-16, and reveals that on the ratio of debt to either income or assets, around three in ten households were classified as “over-indebted”, up from about 21 percent in 2003-4, and it has presumably become even worse in the last year or so.
Owners with a mortgage were the most likely households to be over-indebted – of households with a property debt, 62 percent of 25-34 year olds and 51 percent of 35-44 year olds were over-indebted. Sydney and Melbourne had the highest number of over-indebted households with the average debt much greater in Sydney.
Most over-indebted households (77 percent) lacked sufficient ‘liquid’ assets – bank accounts, shares, own businesses, and superannuation – to cover a quarter of the value of their debts. This is a clear indicator that these households are at risk of defaulting on their loans if their incomes are not sufficient to meet their repayments. This is becoming an increasing concern with declining job security and increasing underemployment, where people can’t get as much work as they would like.
Total household debts are about 220 percent of disposable income, and account for over 120 percent of GDP.
The most recent data on economic growth, for the June quarter of this year, again revealed that consumer spending was mostly to cover the basic costs of living, and was being financed by households either running up debts, or running down their savings, with wage increases at an historical low. Households didn’t have much money for discretionary spending, including on clothing, alcohol and tobacco.
Basically, the necessities of life are costing more – housing, transport, electricity and gas, medical, school fees and childcare, and so on. Even though the costs of some discretionary items had gone down, households didn’t have much spare cash to afford them.
In these circumstances, the Reserve Bank would be most unwise to raise interest rates, which would hit these stretched households quite hard, especially if house prices were also to fall. Our financial system is particularly exposed to such households, and any upward pressure on our exchange rate would make job prospects even weaker.
This also represents a significant challenge for our politicians. As households increasingly feel the pinch, they will be looking for a government that does something to relieve the pressures on their costs of living, and will vote accordingly.
So far, neither of the major parties has provided any hope, let alone any evidence, that they actually understand how tough it is for many families. Indeed, they seem preoccupied by what most voters would see as inconvenient distractions – such as Turnbull vs Abbott, Shorten vs Albanese, same-sex marriage and dual citizenship.
One of the most annoying issues has been the farce that relates to energy and electricity and gas prices, where neither side seems to have a plan to bring these prices down. So it is too with housing affordability. Both these issues have been left to drift, compounded by the short-term, opportunistic, politics being played out at State and Federal level.
Be sure the voters will have the last word!