Newspaper article The Queensland Times (Ipswich, Australia)

Is Household Debt Too High?

Newspaper article The Queensland Times (Ipswich, Australia)

Is Household Debt Too High?

Article excerpt

RISING house prices are partly to blame for concerns from the International Monetary Fund about the rapid growth in Australia's household debt.

The IMF issued the caution earlier this month, saying Australians were spending borrowed money at a "fast rate", which would expose the country to future economic risk.

"High private debt not only increases the likelihood of a financial crisis but can also hamper growth even in its absence, as highly indebted borrowers eventually decrease their consumption and investment," says the IMF.

It is no surprise that Australian households are borrowing more.

House prices keep increasing, requiring larger loans and credit cards continue to become the preferred method of payment for many.

Interest rates are at their lowest ever, making borrowing cheaper than ever, while banks are keen to lend to borrowers in a bid to maximise their profits.

Should we be worried?

The IMF points out that in strong economic times, such as in Australia now, high levels of debt are not a problem.

Australia continues to enjoy a low unemployment rate, meaning the majority of households are able to service their loans.

However, the situation becomes a little more risky if there is an economic downturn and people start to lose their jobs at a high rate, hampering their ability to pay back their loans.

The more debt people have incurred, the more pressure will be applied to the banking system if they can no longer pay them back.

As we saw following the Global Financial Crisis, a banking system under pressure can lead to very disastrous conditions for economies.

Closer to home, the Reserve Bank of Australia outlined in its recent Financial Stability Review that although it is more comfortable about where household debt levels are than they were six months ago, Australia's household debt-to-income ratio continues to increase.

A major concern for the RBA is the state of the apartment market in Australian capital cities, particularly Brisbane and Melbourne CBDs.

The amount of development taking place there is unprecedented and there are concerns about Australian banks' exposure to this sector. …

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