Australians now floating in a record sea of debt

The Age today is reporting new figures from the Reserve Bank of Australia showing income spent to service debt has risen to 11.9 percent in March. In contrast, three months earlier 11.6% of income was spent to service debt.

Credit card debt is also at record highs of $39.6 billion. The average balance in April has risen to $2139, up 8% – the fastest rate in three years. Margin Lending loans are up 40% in the last year, reaching $30.2 billion.

Mr Howard supports the Reserve Bank’s March financial stability review saying most people who took on the debt can afford it. Wages are strong and the unemployment rate at a 32-year low. The increase in debt corresponds with an increase in assets.

Steve Keen, associate professor with the University of Western Sydney, said the argument that the increase in debt corresponded with the increase in assets was misleading because the price of assets such as homes and shares were being driven up by people speculating they would rise.

OECD data shows house prices in Australia is overvalued by more than 80%. Most debt is in housing, which should be viewed as long term. It is great that unemployment is low and wages high now, but what will it be in 5 years time?

“They’ve risen because you have borrowed money and leveraged up the price. What really matters is the debt-to-income ratio and it’s huge,” he said. “Ultimately, we can’t keep on doing it (taking on debt). A recession has to happen at some point.”

» Australians now floating in a record sea of debt – The Age, 22nd June 2007.
» Household debt hits record – The Australian, 22nd June 2007.