Household Debt may actually be “Healthy”!

In an “earlier posting”:, I raised concern over the dramatic increase in household debt — to the point where it now sits at over 150% of household disposable incomes.

As you can appreciate, the major concern has been as to how rising home-mortgage interest rates might cause a flow-on effect for Commercial investors. And this is because a fall in residential prices could adversely impact upon the security for any line-of-credit you may have against your home.

h3. How does Australia compare?

Sub-Prime LoansAustralia has nothing like the exposure the US now has to sub-prime debt. Nonetheless, our present high level of household debt is causing nervousness in some circles. But maybe things are not as bad as first thought.

In fact, Alan Mitchell (in a recent AFR article) wrote a very compelling article on a study conducted by the Reserve Bank about the rise of household debt in 18 countries. And it seems the consensus is that (with respect to household debt) things are felt to be reasonably “healthy”.

Debt GrowthThe table shows the growth in household debt within industrialised economies since the mid-1980’s. Australia came late to the party — but with more enthusiasm.

The Reserve Bank study explains that people are tending to take on debt for a combination of reasons:

* benign inflation,
* good job security,
* anticipated salary growth,
* maintaining their living standards,
* smoothing out expenditure peaks,
* the general increased cost of housing,
* less risk adverse and impatient to spend.

h3. You’ll be interested in the RBA’s conclusion

People now have better access to credit — allowing them to better manage their cash flow and maintain their level of consumption, through the economic ups and downs.

It appears that across the 18 countries … those with the “largest increases in household debt generally had the bigger declines in inflation, in the volatility of economic growth , and in unemployment.”

Perhaps the world of debt is now operating under new rules. And I simply wanted you to be aware of the study — to give you a balanced view.

However, you ought still lock in your rates for as long as you can; and keep your eyes peeled.

Anyway, let’s have you thoughts on how you believe things might unfold.

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