As consumers, it seems we collectively find it difficult to resist the temptation of a bargain. Particularly when the thing that’s going unbelievably cheap is credit…even if it means forgetting harsh lessons from the ghosts of Global Financial Crisis’ past.
Recently, the International Monetary Fund (IMF) started getting blustery about the debt burden carried by Australian households.
Apparently we have short-term memory loss of some kind. Because even though many suffered the ill effects of mismanaged debt back in 2008, it seems we’re again dancing to a similar tune.
This time the beat is low interest rates, which are fuelling a (literal) home shopping splurge, and in turn making for a growing number of homeowners with access to quickly accelerating equity.
Nice way to boost consumer confidence wouldn’t you say? But are we becoming just a little bit too confident…and maybe a tad complacent?
When did this happen?
Mortgagee Property recently published findings that show Australian household GDP debt has doubled, to an unparalleled 130 per cent plus of GDP, since the 2008 GFC.
“To put this in perspective, Australian public debt peaked above 170 per cent of GDP during the Great Depression but household debt has never been remotely close to its current levels,” noted reporter Scott Talbot.
In fact, the OECD ranks Australia as having the fifth highest level of debt in the world.
Meanwhile, LF Economics’ analysis of national statistics shows that as of the third quarter of 2015, Australia has the world’s most indebted household sector relative to GDP.
“The rapid rise of capital city house prices in the past two years has propelled Australia past Denmark with a ratio of 123.08% debt to GDP, analysis shows.”
Now, Barclays’ chief economist for Australia, Kieran Davies, is warning that with private sector debt-to-income gearing at an all time high of 206 per cent (up from a pre-GFC level of 191 per cent), our country would be vulnerable in the wake of any further global financial shock.
Just as long as the rest of the world looks good then…err…
Not so much
The IMF is sounding the alarm bells around a global ‘debt binge’, with public and private debt levels having recently reached $US152 trillion.
“Private debt has continued to accumulate at a fast pace, notably in Australia, Canada and Singapore,” the IMF cautions.
According to the IMF’s head of fiscal affairs Vitor Gaspar, “At $US152 trillion, global debt is at record highs and constitutes one of the most important headwinds against growth in the global economy.”
China has been singled out as systemically important, with its high corporate debt levels potentially resulting in a disorderly deleveraging of debt.
“If the corporate debt problem in China is left unaddressed it will have significant consequences in China and increase the risks of a hard landing,” warned Gaspar.
It’s definitely not just us folks down at the bottom of the world who are ‘binging’ on credit. In Britain, the Bankers Association recorded a 6 per cent growth in borrowing on personal loans and credit cards in the year to September 2016, the fastest since pre-GFC back in December 2006.
Apparently households across the motherland have been taking advantage of their own low interest rate environment; somewhat ironically wracking up huge non-productive debt that attracts much higher interest rates to buy new cars, clothes and trips abroad.
According to chief economist for the British Bankers Association Dr Rebecca Harding, “Consumers are increasingly using short-term borrowing to take advantage of record low interest rates. This trend has accelerated since the Bank of England cut rates in August.”
Logically, households tend to borrow more and spend more when they’re feeling all warm and fuzzy about their finances.
Local debt charities in the UK have raised fears that it’s getting beyond tipping point for many, with a spokesman from StepChange Debt Charity saying these figures are “cause for serious concern”.
“The worry is that we return to the bad old days we saw prior to the credit crunch, where too many households were able to build up unsustainable balances. The sad reality is that increased consumer borrowing will, for some people, turn into the nightmare of problem debt.”
While Brits might be riding high on cheap housing credit, with the official interest rate sitting at a record low 0.25 per cent, the average annual credit card rate has climbed from 21.2 per cent in January this year, to 22.3 per cent in August.
Which way is up?
It’s difficult to know where the current debt crisis, which many seem unwilling to openly acknowledge, will lead…given the world is more economically inter-connected now than ever. But we seem to yet again be approaching that slippery slope of major financial upset.
When you consider that collectively, humans owe over 2000 times more US dollars than there are people walking the planet, it gives pause for thought. Well, many thoughts really.
As always, here at Trilogy Funding we’re all about safety in numbers…the numbers we carefully analyse to determine your comfortable debt threshold as a leveraged property investor, and the balance of your buffer!
Because when it comes to world debt levels, the ‘proverbial’ seems to be getting very real. Be prepared…for as much as you can.