HOUSEHOLD debt is higher in Australia than anywhere else in the advanced world, exposing the economy to risks in the event of another financial crisis.
Household debt is equal to 130 per cent of GDP, according to analysis by Barclays chief economist Kieran Davies, compared with an average across the advanced world of 78 per cent.
Australia’s debt levels are going up at a time when those of other advanced nations are coming down and Mr Davies said the Reserve Bank’s new round of rate cuts was likely to push the level of household leverage even higher.
Reserve Bank governor Glenn Stevens warned households last year against taking on excessive debt, saying leverage was already very high and “we would surely be asking for trouble if we see a big step up from where we are”.
Household debt was at 116 per cent of GDP before the financial crisis. It held steady until 2013, when the boom in investment property set it rising again.
“The tricky thing for the Reserve Bank is that promoting leverage is the key channel for the transmission of lower interest rates through to the rest of the economy,” Mr Davies said.
Not only is household debt higher here than elsewhere, it is also higher now than at any time in Australia’s history. The level of bank lending as a share of GDP can be traced back to the 1850s and the level now is more than double the share of the previous peak, during the 1890s land boom.
“With high levels of leverage by world standards, where debt is concentrated in the household sector, we see this as a vulnerability in the event of another global shock,” Mr Davies said.
The level of household debt in Australia is inflated by the much greater popularity of real estate as an investment than in other countries, fostered by the ready availability of negative gearing tax concessions and favourable capital gains tax treatment.
Mr Davies said the banking regulator, the Australian Prudential Regulation Authority, was likely to impose new regulatory measures on lenders to curb the growth of investment property loans. In collaboration with the Reserve Bank, APRA imposed limits last year on the rate at which investment property loan portfolios could rise. Mr Davies said APRA could impose an additional capital charge on all investment property loans.
While households have been increasing their debt, companies have been cutting back. Among advanced countries, only 25 per cent have companies with less debt than in Australia.
Australian companies had debts equivalent to 84 per cent of GDP before the financial crisis. They had cut it to 67 per cent by 2011, but it has since crept back to 76 per cent. This compares with a world average of 106 per cent.
Mr Davies said the low level of debt reflected the fact that the resource companies had been able to finance much of their expansion from retained earnings, while investment levels in the rest of the economy had been extremely weak.
However, combined private-sector debt of households and business is still more than double the size of the economy, at 206 per cent of GDP. Mr Davies found that 75 per cent of advanced countries had smaller private-sector debt than that.
Although beyond the scope of his study of private-sector debt, Australia’s international standing as a borrower on world markets is helped by the low level of public-sector debt, which at 16 per cent of GDP is far below the advanced-country average of 74 per cent.
However, Mr Davies said ratings agencies such as Standard & Poor’s look at the total level of private-sector debt and the extent to which the government would be liable for private debt defaults.