Australia’s Achilles’ heel – high household debt and rising interest rates…it’s not as bad as it looks, but it’s still an issue

June 29th 2022

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Key points

  • Australian household debt has risen dramatically since the 1980s and is high compared to other countries.
  • The rise is not as bad as it looks because it’s been matched by rising wealth and debt servicing problems are low. However, this will likely change as interest rates rise further & if dwelling prices fall sharply.
  • High debt levels will mean the RBA won’t need to raise rates as much as in the past to control inflation or as much as the money market currently expects.



If Australia has an Achilles’ heel it’s the high level of household debt that has accompanied surging home prices over the last 30 years. Of course, in the absence of a major trigger for debt servicing problems – either from a surge in unemployment or a surge in interest rates – it hasn’t so far caused a major problem for the economy. Fears that the pandemic would deliver a trigger in the form of higher unemployment were quickly headed off by JobKeeper and record low-interest rates. But a potential trigger is now upon us again with rising interest rates.
At one extreme some see rising interest rates and high household debt as setting the scene for a perfect storm of a surge in mortgage stress, forced selling and a crash in property prices causing a big hit to the economy. At the other extreme, some point out that the household sector is actually in good shape given a surge in wealth including a big rise in bank deposits so there is no need for concern. The truth is probably in between these two extremes. And much depends on how high-interest rates go. This note looks at the main issues.


Australia – from the bottom to the top in debt

The next chart shows the level of household debt relative to annual household disposable income for major countries.


aus achilles heel 1


While rising household debt has been a global phenomenon, debt levels in Australia have gone from the bottom of the pack to near the top. In 1990, there was on average $69 of household debt for every $100 of average household income after tax. Today, its $187 of debt for every $100 of after-tax income.


What’s driven the rise in debt?

The increase in debt reflects four things. First, increased competition amongst lenders following financial deregulation in the 1980s which made debt more available. Second, progressively lower interest rates since the late 1980s have made debt seem more affordable. Third, attitudes to debt have become more relaxed as memories of wars and severe economic downturns have faded so debt seems less risky at the same time that modern society encourages instant gratification as opposed to saving for what you want. So, each successive generation since the Baby Boomers has been progressively more relaxed about taking on debt. And finally, it’s become somewhat self-feeding in that rising debt has enabled home buyers to pay more for homes which in turn has necessitated rising debt levels to get into the property market.


aus achilles heel 2
Source: ABS, CoreLogic, AMP


It’s not quite as bad as it looks

There are several reasons why it’s not quite as bad as it looks:


aus achilles heel 3
Source: ABS, RBA, AMP


So, while average household debt for each Australian has risen from $11,779 in 1990 to $107,318 now, average wealth per person has surged from $87,489 to $655,894.


aus achilles heel 4
Source: ABS, RBA, AMP


As a result, Australians’ household balance sheets, as measured by net wealth (assets less debt), are healthy. Net wealth relative to income has surged over the last 30 years and is high relative to comparable countries.


aus achilles heel 5



aus achilles heel 6
Source: RBA, AMP



But high debt has likely still increased the vulnerability of the household sector

While this analysis indicates that the rise in household debt in Australia is not as bad as it appears, its rise still leaves many households more vulnerable to rising interest rates (& higher unemployment) than in the past. After all, “it’s not what you own that might send you bust but what you owe.”


Concluding comment

This all sounds rather gloomy. The key though is that the RBA only needs to raise interest rates far enough to cool demand to take pressure off inflation and keep inflation expectations down. While the household sector in aggregate is stronger than a focus on the household debt alone would suggest, the rise in household debt has made monetary policy more potent than it was in the past which in turn will limit how much the RBA will need to raise interest rates by. While the RBA is hiking more aggressively now to reinforce its commitment to the 2-3% inflation target, the greater sensitivity of the household sector to rising interest rates is likely to become evident fairly quickly which will mean the RBA won’t have to raise interest rates as far as the 4% or so cash rate that the money market is assuming. We continue to see the cash rate topping out at around 2.5% in the first half of next year.


If you have any questions about this please get in touch with us.

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Source: Russel Investments

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