February 24th, 2018

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Australias Household Debt Crisis Looms 1

Australia’s Household Debt Crisis Looms

Today in the news, former economics advisor John Adams suggested that Australia is too late to stop an ‘economic apocalypse’ in spite of his continual warnings to the political elites in Canberra. He proceeded to advise the Reserve Bank to raise interest rates to avoid household debt getting further out of control.

This bubble is easy to spell out. Confidence! It’s the unfounded perception that Australia’s last 20 years of continual economic growth will never experience any sort of correction is most unsettling. Australia survived the GFC and a mining boom and bust. Meanwhile, 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 reside in these two cities, and see Australia’s economic hurdles through a totally different lens to the remainder of the country. It’s a two-speed economy spiralling out of control.

I accept that this looming crisis isn’t just as simple as house prices in our two biggest cities, however the median house prices in these cities are ever rising and contribute strongly to total household debt. The specialists in Canberra understand that there’s an overheated house market but seem to be repugnant to take on any severe actions to correct it for fear of a house crash.

As far as the remainder of the country goes, they have a completely different set of economic considerations. For Western Australia and Queensland particularly, the mining bust has sent house prices tumbling downwards for years now.

Just one of the signs that illustrate the household debt crisis we are beginning to see is the rise in the bankruptcy numbers throughout 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 team are encountering the incapacitating effects of house prices going backwards. Even though it is not the primary cause of personal bankruptcies, it undoubtedly is a critical factor.

House prices going backwards is just part of the predicament; the other thing is owning a home in Australia enables lenders to put you in a very different space as far as borrowing capacity. Put simply, you can borrow much more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the level of debt varies dramatically from the non-home owner to the home owner. Lending is hinged on algorithms and risk, so I suppose if you own a home you’re more likely to have reliable income and less likely to end 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 due to the fact that 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 seems we are running into a wall at full speed, and there are few people suggesting we slow down. If you want to know more about the looming household debt crisis then get in touch with us here at Bankruptcy Experts Canberra on 1300 795 575 or visit our website to find out more: www.bankruptcyexpertscanberra.com.au