Household debt a concern for 2018?
Most of us have left summer holidays behind and returned to work, school has started, businesses are up and running, and 2018 is well underway. So, what do we have to look forward to in 2018?
With regard to the Australia economy, 2018 is looking promising. The Reserve Bank has forecast our GDP growth to exceed 3 per cent over the next couple of years and recently stated, ‘Business conditions are positive and the outlook for non-mining business investment has improved.’
But there is one shadow on the horizon.
‘One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high,’ says Reserve Bank Governor Philip Lowe.
In a recent article in The Australian, Michael Rodin states, ‘Australia’s household debt-to-income has exploded to the 200 per cent level … after rules requiring the accurate measurement of property investment by self-managed superannuation funds were included in official statistics. The Australian Bureau of Statistics upwardly revised its debt levels … taking Australia’s household debt levels to 200 per cent, from 194 per cent—making it one of the highest in the world.”
What exactly is meant by ‘household debt’?
Household debt is simply the combined debt, including mortgages, personal loans and credit cards, of everyone in a household. Having debts is not in itself a problem, but the level of debt can become a problem.
In late 2017, the Australian Bureau of Statistics (ABS) released a report, ‘Household Debt and Over-Indebtedness in Australia’. The term ‘over-indebted’ in the report was based on definitions used by the Organisation for Economic Co-operation and Development (OECD):
debt-to-income ratio, where over-indebted households had debt three or more times their annual disposable income; and
debt-to-asset ratio, where over-indebted households had debt equal to 75% or more of the value of assets.
According to the ABS report:
In 2015-16, three-in-ten households (29%) were classified as ‘over-indebted’
This was up from 21% in 2003-04
Owners with a mortgage were most likely to be over-indebted (47%)
Average home loans for over-indebted households were over four times the size of home loans held by other households carrying debt ($286,400 compared to $59,500)
High income households were also more likely to be over-indebted.
Most over-indebted households (77%) lacked sufficient ‘liquid’ assets (i.e. assets which can be easily converted to cash) to cover a quarter of the value of their debts.
Should I be concerned about my ‘household debt’?
The ABS report noted that, ‘Over recent years, rising property prices, declining interest rates and easier access to consumer credit has seen Australian households grow more comfortable with debt. However, high levels of debt, when considered against the value of current household income and assets, indicates vulnerability in the event of an economic shock, such as increases to interest rates, the loss of a job, illness or injury, a change in family circumstances or a drop in asset prices.’
Now, at the start of a new year, is a good time to take a look at your household debt and evaluate it against your income and assets and determine if it is manageable and healthy. Or does your current level of debt put you, and your family, in a vulnerable position?
In helping determine this the team at IQ Capital Group are equipped to assess your debt profile and recommend strategies and structures for debt reduction, wealth management and risk mitigation.
If you would like assistance to develop a plan to reduce your household debt, please contact our team. Now is the perfect time to get started!
Note: This is general information that does not take into consideration the details of your individual situation. Please consult a qualified financial advisor before making decisions about your finances.