Money Minute – May 5 2017 Debt Warning

Debt Warning

Good morning sir happy Friday to you.

Listen I had to go yesterday at warning you more specifically, the mortgage insurer Genworth warned you about risky lending and housing. So I may as well have another go, this time courtesy of Reserve Bank governor Phillip Lowe. Now the governor was speaking to the Queensland branch of the economic society, not normally the place of fireworks I know, but he had a good go at lighting the place up.

So here goes from Phillips speech: “My overall assessment is the recent increase in household debt relative to our incomes, has made the economy less resilient to future shocks.”

So what does that mean? Plainly it means households in the past 20 years, but especially the past five have pushed debt to the max which means they and the economy are vulnerable if there’s a downturn.

While we talk a lot here about government debt, it’s really the household debt that’s the big problem. Debts have tripled from around 60 % of household income 25 years ago, to close on 180% today. Part of the reason is interest rates came down, so despite that rising debt the interest we pay is lower over the past eight years, from almost 12% to under 9% of our disposable income.  Now this gives a clue about the pain when interest rates rise, and that’s a win, for it will eventually happen.

The other problem is wages are growing at close to the slowest rate on record. Normally if your incomes rising, you eventually get on top of your debts. But that’s harder when the income growth is slow. From Phillip Lowe, it’s younger families 35 to 44 and 45 to 54 who have all the debt. That makes a bit of sense, but it’s the increase in the debt that makes you understand the rising pressure inside Australian families.

Let me finish with another quote from Philip Lowe: “The resilience of our economy would be enhanced by an extended period in which housing prices and debt outstanding increases no faster than our incomes.” What’s that mean? He’s hoping for a soft landing, property prices going sideways for a very very long time.

Source: Today Show Money Minute/Ross Greenwood

Interest-Only Home Loan Crackdown

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