Australia’s Household Debt Crisis Looms

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

This bubble is easy to illustrate. Confidence! It’s the inaccurate perception that Australia’s last twenty years of sustained economic growth will never encounter any form of correction is most distressing. Australia survived the GFC and a mining boom and bust. In the meantime, Melbourne and Sydney house prices have not skipped a beat or taken a backward step. Sadly, the decision makers and powerful elite in this country live in these two cities, and see Australia’s economic problems through a completely different lens to the remainder of the country. It’s a two-speed economy spiralling uncontrollably.

I acknowledge that this impending crisis isn’t just as straightforward as house prices in our two largest cities, but the average house prices in these cities are ever rising and contribute significantly to overall household debt. The experts in Canberra realise there’s an overheated house market but seem to be detested to take on any severe actions to correct it for fear of a housing crash.

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

Among one of the indicators that illustrate the household debt crisis we are starting to see is the increase in the bankruptcy numbers across the entire country, specifically in the March 2017 quarter.

(source: https://www.afsa.gov.au/about-us/newsroom/media-release-regional-personal-insolvency-statistics-march-quarter-2017).

In the insolvency sector, our firm are noticing the distressing effects of house prices going backwards. Although not the primary cause of personal bankruptcies, it clearly is a vital factor.

House prices going backwards is just part of the challenge; the other thing is owning a home in this country allows lenders to put you in a very different space as far as borrowing capacity. Simply put, you can borrow a lot more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the level of debt fluctuates significantly from the non-home owner to the home owner. Lending is founded on algorithms and risk, so I suppose if you own a home you’re more likely to have reliable income and less likely to wind up bankrupt, so in turn you can borrow more. If you own a home in Melbourne or Sydney, you’re a safer risk than if you own a home in Mackay, simply because 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 appears we are running into a wall at full speed, and there are not too many people suggesting we slow down. If you would like to know more about the looming household debt crisis then give us a ring here at Bankruptcy Experts Penrith on 1300 795 575 or visit our website for additional information: www.bankruptcyexpertspenrith.com.au

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