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Debt, the Housing Bubble and Consequences

Over the many years I have been commenting on the Real Estate market, most of you will have noted that I have generally been cautious and conservative with my outlook.

I guess it was something I read when I first started in real estate… namely the observation that “there is no new way to go broke. It is always too much debt.”  And right now there are so many ways of spending money you don’t have and failing to understand that you cannot postpone repayment forever.  Credit cards, buy now – pay over 5 years with no interest and of course the lowest bank interest rates in history.  While some of the borrowed money has gone to fuel a more lavish lifestyle, the bulk of it has gone into housing.

Whether it is the belief that “the time is different” (house process won’t fall) or buyers rushing in thinking that they will miss out if they don’t buy now, the housing market has taken off and dragging with it the level of debt.

Following the recession of the early 1990’s, Australia had a debt level of 80% to disposable income.  This effectively meant that there was money LEFT OVER to save, but from there we collectively set of on a 15 year run of increasing debt so by the time the GFC hit it had reached 170%.  During the GFC and the year following there was a slight breather in this climb up the debt mountain but the last few years after dramatic RBA cuts to the interest rates has seen the current level of an unprecedented 188.7%

The Reserve Bank governor made it clear in a recent speech that warning signs were there and that “slow growth in wages is making it harder for some households to pay down their debt”.  He called this a “sobering combination”!

On the positive side, the ratio of debt to asset values has decreased only because house prices have risen faster and with the low interest rates, some people have been able to pay off their debt more quickly.

However, this ratio only works so long as the asset prices keep rising and interest rates stay low.  It can get very ugly, very quickly should house prices fall or interest rates begin to rise.