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Australians’ household debt nears highest worldwide

Australia’s personal debt is some of the "highest in the world", but what does this really mean?

Australian household debt has steadily risen over the past three decades as more of us aim to own homes and continue to rely on products such as car loans and credit cards. In fact, the ratio of household debt to income has more than doubled between 1995 and 2015, going from 104% to 212%, according to the OECD Data released in 2015. This means if the average person earns $80,000 net, they are spending $169,600 per year.

While many other developed countries have seen a decline or “levelling out” of personal debt since the 2008 global financial crisis, Australia’s debt levels have continued to increase. As a result, Australia is now reported to have some of the highest personal debt levels in the world.

How does Australia’s household debt compare to other countries?

Global comparisons of household debt usually look at the total owed as a percentage of net income. Australians rank fourth highest in the world next to Denmark, the Netherlands and Norway.

What is Australia’s personal debt?

As of 2016, Australia’s total personal debt is around $2 trillion and the average Australian household owes $250,000. This debt can be broken down into the following categories.

  • Mortgages. Australian Bureau of Statistics (ABS) data analysed in the AMP.NATSEM report showed that mortgages for owner-occupier housing makes up 56.3% of all personal debt in Australia.
  • Investor debt. Debt associated with investments such as rental properties or shares makes up 36.5% of our household debt.
  • Personal debt. Personal loans make up 3.1% of Australian household debt and are commonly used to buy cars, other consumer items or to pay for holidays.
  • Student debt. Debt from student loans, particularly Higher Education Loan Program (HELP) loans (formerly known as HECS), makes up 2.1% of Australian household debt. The AMP.NATSEM report says this figure reflects the time it takes to pay off these loans, with repayments typically deducted from your salary when you reach the threshold ($54,869 for the 2016-17 tax year).
  • Credit card debt. While there are often reports on the sheer volume of credit card debt in Australia, it only makes up 1.9% of all household debt.

The difference between “good” and “bad” debt

While Australia’s total personal debt is usually reported in a negative light, it’s important to distinguish between the different types of debt that make up the $2 trillion we collectively owe. On a very basic level, these debts can be defined as either “good” or “bad”:

  • Good debt. This type of debt is taken on as a way to build wealth in the long term. For example, a home loan allows you to work towards owning your own home, and an investment property mortgage allows you to earn income from property you rent out or re-sell at a higher price.
  • Bad debt. This type of debt diminishes your wealth over time. This means it is not attached to an asset, and usually indicates you have paid for items or services you would not be able to afford based on your income. For example, relying on a credit card for non-essential items, or those that diminish in value over time, would lead to bad debt.

When it comes to Australia’s personal debt, it’s important to note that the majority of it can be defined as good debt, with 56.3% going to home loans and 36.5% to investments. That’s a total of 92.8% of our personal household debt spent on potential wealth-creation.

There is also the other 8.2% of household debt to consider. If each Australian household owes an average of $250,000, then $20,500 of it is “bad debt”.

As a comparison, data from the Federal Reserve Bank of New York shows that non-housing personal debt (i.e. “bad debt”) made up 26.3% of America’s personal debt in the first quarter of 2016. Further information also shows that household debt in the US is increasing due to a rise in credit cards and car loans, both of which are considered “bad debts”.

The role of income and interest rates

Whether we have good or bad debt, there is always a degree of risk involved. If circumstances change, or if you have borrowed beyond your means, then it could be difficult to sustain any debt over the long term. This can lead to defaults and more serious issues such as bankruptcy. If that happens, any “good” debt will quickly go “bad”.

So as well as considering the types of personal debts Australians carry, it’s important to look at factors such as our income and interest rates. Significantly, Australia’s personal debt levels have outstripped income growth and led to a debt-to-income ratio of 88%.

On the other hand, declining interest rates have helped keep repayments at a relatively manageable level. As the AMP.NATSEM report shows, the typical ratio of debt interest repayments to disposable household income is sitting at around 6%.

However, the high debt to income ratio means that an increase in interest rates or changes to housing prices could have serious consequences. With income growth predicted to remain low and ongoing speculation about supply-and-demand issues in the housing market, Australia’s personal debt is often viewed as a major risk for both individuals and the country’s economy.

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Top three tips for managing household debt

While stats and data can help put things in perspective on a national and global scale, it doesn’t necessarily affect us on an individual level. When compared to the national averages, some households will have higher levels of debt and more repayment stress and others will have less.

The bottom line is that if you have debts, it’s important to find a way to manage them. So here are three strategies to keep in mind:

  • Consolidate “bad” debts. If you have several credit cards and personal loans you’re currently repaying, it may be worth consolidating them into one account. This simplifies your repayments and means you only have to deal with one interest rate. Depending on the types of debts and how much you owe, you may be able to take advantage of a 0% balance transfer credit card or a low rate personal loan to help save money on interest charges.
  • Create a budget. Budgets are a useful tool for seeing what money is coming in and going out of our accounts. This makes them essential for managing your money if you have ongoing debts. You can use our free budgeting tool to get a detailed summary of your current income and expenses, then make adjustments to your spending or savings based on your individual circumstances and needs.
  • Set up a regular savings account. Savings are an important part of your household finances, allowing you to pay for larger purchases and acting as a safety net when unexpected costs arise. By regularly contributing to a savings account, you’ll increase your wealth without taking on any more debt. Savings can also help you keep non-essential loans to a minimum so that you don’t end up taking on more “bad debt”.

Australia’s personal debt may be among the highest in the world when compared to GDP, but the majority of it is from home loans and investments. This means that as long as you can find ways to manage your wealth-building debts based on your circumstances and income, you could end up better off in the long run.

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